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Real Wage Flexibility in the Enlarged Eu: Evidence From a Structural Var

Published online by Cambridge University Press:  26 March 2020

Jan Babecký  and
Kamil Dybczak
Jan Babecký*
Affiliation:
Czech National Bank
Kamil Dybczak*
Affiliation:
European Commission
*
e-mail jan.babecky@cnb.cz
e-mail kamil.dybczak@ec.europa.eu
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Abstract

Membership in the monetary union imposes higher demands on factor market flexibility, since neither the exchange rate nor monetary policies can be used to deal with country-specific shocks. In this paper we assess the ability of the twelve new EU member states (NMS-12) to dampen the impact of shocks by means of macroeconomic wage flexibility. Following the structural VAR approach elaborated in Moore and Pentecost (2006), real wage flexibility is measured by the responsiveness of real wages to real (permanent) and nominal (temporary) shocks. The analysis of Moore and Pentecost (2006) is extended in three ways: by employing a new Eurostat labour cost data set covering 1996Q1 to 2007Q3, by using a large sample of 24 EU member countries, and by assessing the sensitivity of the results to the sample length. We find evidence of heterogeneous real wage adjustment across the new as well as the mature EU economies. Overall, the degree of real wage flexibility in the NMS-12 lies within the bounds of the corresponding values for the Euro Area ‘core’ and ‘peripheral’ member countries.

Keywords

Wage flexibilitystructural VAR JEL Classifications: E24C22F02J30P20E24C22F02J30P20
Type
Articles
Information
National Institute Economic Review , Volume 204 , April 2008 , pp. 126 - 138
Copyright
Copyright © 2008 National Institute of Economic and Social Research

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Footnotes

∗

This paper represents the authors' own views and should not be construed as representing those of the Czech National Bank or the European Commission. The authors are grateful to Giuseppe Bertola, Alex Cukierman, Kamil Galuščák, Dawn Holland, Theodora Kosma, Ana Lamo, Frank Smets and seminar participants at the ECB Wage Dynamics Network for discussion and helpful comments. However, all errors and omissions remain entirely the responsibility of the authors.

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