20 Ian Babetskii
which is above the sample mean across 85 countries (0.49) and much higher than, for example, in
the case of the United Kingdom (0.28) or the United States (0.22). The rigidity in the CE-4 is
slightly lower than in the three ERM-II participants. The pattern of rigidities at the micro level
does not differ much from the estimated macroeconomic indicators of wage flexibility. A similar
finding of no significant wage flexibility is reported in RadziwiH and Walewski (2003). The
authors analyze a broad set of indicators at the macro and micro levels and conclude that wages
are not flexible in six new member states (accession countries at that time), except for some
evidence of flexibility in Lithuania.
6. Conclusions and Policy Implications
In this paper we have attempted to measure aggregate wage flexibility in eight new EU member
states, applying classical time series/panel estimates and time-varying and cointegration
techniques. The macroeconomic data over the past decade do not seem to support the argument
that the degree of wage adjustment is significantly higher for countries which already participate
in the ERM-II. Nor is wage flexibility higher in the three EMU members selected. Several policy
implications follow from the analysis.
First, the assessment of wage flexibility gives some indication of the costs related to entering the
ERM-II and subsequently the euro area. Indeed, the degree of wage flexibility (nominal, real)
shows the extent to which various shocks can be accommodated by wages. In the hypothetical
example of perfectly flexible wages, abandoning independent exchange and interest rate policies
would not be costly, since any external or internal shocks would be accommodated by wages. In
the opposite extreme case of rigid wages (and assuming no labor mobility), other channels will
bear the burden of shocks. For instance, an increase in unemployment is one possible outcome of
wage rigidities. A lack of wage flexibility is considered to be one of the costs of euro adoption.
However, the costs should be assessed against the potential benefits of joining the euro area.
Second, there is a question of whether wage flexibility is endogenous to fixing the exchange rate.
In other words, is high wage flexibility required prior to euro adoption in order to minimize the
adverse impact of shocks, or will the mere fact of joining the euro area improve wage flexibility
ex post? The results of our study suggest that higher wage flexibility is an attribute of neither the
current ERM-II participants nor the three peripheral EMU members. Hence, joining the euro area
is not likely to lead automatically to higher wage flexibility. Rather, the opposite effect could
occur. Therefore, there is a call for adopting more flexible labor market policies in the monetary
union in order to be better able to address asymmetric shocks.
Third, in a low-inflation environment, real wage flexibility becomes almost synonymous with
nominal wage flexibility, and both terms characterize the cost of disinflation. However, if nominal
wages are rigid, especially downward, then the adjustment to shocks would go more quickly via
real wages at higher inflation rates. Indeed, real wages can decrease due to a reduction in nominal
wages or due to a rise in the price level. If nominal wages are sticky, then non-indexed price
increases reduce the real cost of labor. Thus, the observed episodes of real wage flexibility during
the 1990s could be at least partially linked to inflation, which reached two-digit numbers in a
number of countries. Consequently, a decline in inflation in the new member states over the past
decade may have naturally contributed to the observed decrease in real wage flexibility, or the
absence of such.