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Shocks and rigidities as determinants of CEE labour markets’ performance

A panel SVECM approach

Authors


  • We thank the Editor, referee and participants of conferences and workshops in Warsaw and Mannheim for constructive comments. Our research was supported by the Bureau for the Integration with the Euro Area of the National Bank of Poland. This article does not necessarily reflect the views of the Bureau. All errors are ours.

Abstract

In this article, the impact of real wage, productivity, labour demand and supply shocks on eight Central and Eastern European (CEE) economies from 1996–2007 is analysed with a panel structural vector error correction model. A set of long-run restrictions derived from the dynamic stochastic general equilibrium (DSGE) model is used to identify structural shocks, and fluctuations in foreign demand are controlled for. We find that the propagation of shocks on CEE labour markets resembles that found for OECD countries. Labour demand shocks emerge as the main determinant of employment and unemployment variability in the short-to-medium run, but wage rigidities were equally important for observed labour market performance, especially in Poland, Czech Republic and Lithuania. We associate these rigidities with collective bargaining, minimum wage, active labour market policies and employment protection legislation.

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