12 Ian Babetskii
To assess the stationarity properties of the data, we apply standard techniques: the augmented
Dickey-Fuller (ADF), Phillips-Perron (PP), and Kwiatowski-Phillips-Schmidt-Shin (KPSS) unit
root tests8. Overall, the series of price inflation, wage inflation, unemployment, real wages and
productivity in the NMS-8 and EMU-3 can be characterized as integrated of order one.
Concerning the exchange rate arrangements, we construct a dummy variable for ERM-II
membership. One reason for introducing this dummy is to characterize fixed exchange rate
regimes: three of the four countries from our sample which participate in the ERM-II (Estonia,
Latvia, and Lithuania) have more than a decade of “hard peg” history. Another meaning of the
ERM-II dummy is a proxy for readiness for euro adoption. Although Slovenia has formally
followed a policy of managed floating since 1992, its participation in the ERM-II together with
the three Baltic States indicates a serious intention to join the EMU (after the mandatory two years
in the mechanism) and, hence, abandon its autonomous exchange rate and monetary policies.
On the other hand, the countries of the CE-4 group, apart from having postponed euro adoption
for at least several years, are also characterized by more flexible exchange rate arrangements.
Since the beginning of the 1990s, the exchange rate development in three of these countries can
be characterized as a move “from fixed to floating”: the Czech Republic abandoned its fixed peg
in 1997, Slovakia did so in 1998, and Poland switched from a crawling peg to free floating in
2000. Finally, Hungary maintained a crawling band till 2001 (then adopted a fixed band with
±15% fluctuation margins).
Based on exchange rate considerations, we intend to test whether there are significant differences
in labor market/wage adjustment across these two groups of countries as well as within these
groups. We will also verify whether wages are more responsive to shocks in countries deprived of
exchange rate and monetary autonomy (the EMU-3 group)
5. Results
5.1 Time Series/Panel Methods
Table 3 presents time series estimates of the Phillips curve (1) for the CE-4, ERM-II participants,
and the EMU-3 countries. The elasticity of wages with respect to unemployment (the coefficient
C2) may take positive or negative values. Negative values suggest wage flexibility, i.e., an
increase in unemployment depresses wage growth. On the other hand, positive or insignificant
values of wage elasticity indicate an absence of wage flexibility (a phenomenon known in the
literature as hysteresis. Estimations are performed on two equal sub-periods, 1995-1999 and
2000-2004. The results suggest that several countries (the Czech Republic, Hungary, Lithuania,
and Greece) experienced a decrease in wage flexibility (the elasticity changed from negative
values for 1995-1999 to insignificant numbers for 2000-2004). Interestingly, for the last period
wage flexibility is insignificant in all the countries listed.
8 For a popular description of the identification strategy, see, for example, Enders (2004). Due to space
limitations, the results of the unit root tests are not reported here, but are available upon request.