CESifo Working Paper No. 1916
Aggregate Wage Flexibility
in Selected New EU Member States
Abstract
A fixed exchange rate regime eliminates one degree of freedom in absorbing macroeconomic
shocks. Therefore, there is a call for higher labor market flexibility in countries which are
members of the monetary union or those which intend to join the monetary union. Focusing
on the cross-country analysis of labor markets in the enlarged European Union over 1995-
2004, this paper aims to assess empirically the role of aggregate wages as a correction
mechanism for dealing with economic disturbances. We apply classical time series/panel,
Bayesian, and cointegration techniques to determine the extent to which aggregate wages can
accommodate shocks in the economy.
JEL Code: E24, E52, C22, C33, P20.
Keywords: ERM-II, euro adoption, labor market, wage flexibility.
Ian Babetskii
External Economic Relations Division
Czech National Bank
Na prikope 28, 115 03 Praha-1
Czech Republic
December 2007
The author is grateful to Nicoletta Batini, Vladislav Flek, Kamil Galuscak, Thomas Helbling,
Mathilde Maurel, Luc Moers, Daniel Munich, Pape N’Diaye, Miroslav Singer, Emil Stavrev,
Iulia Traistaru-Siedschlag, and seminar participants at CESifo Area Meeting, EALE,
Euroframe, the CNB and the IMF for discussion and helpful comments. An earlier version of
this paper was published as the Czech National Bank Working Paper, No. 1/2006. This work
was supported by Czech National Bank Research Project No. E2/2005. Some parts of the
paper were prepared when the author was the IMF-GDN visiting scholar in the International
Monetary Fund Research Department during February-March 2005. Support from the Global
Development Network program is acknowledged. This paper represents the author’s own
views and should not be construed as representing those of the Czech National Bank or the
International Monetary Fund. However, all errors and omissions remain entirely the
responsibility of the author.
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