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The unemployment benefit system and wage flexibility in EMU: time-varying evidence in five countries

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  • PLASMANS, Joseph
  • MEERSMAN, Hilde
  • VAN POECK, André
  • MERLEVEDE, Bruno

Abstract

A large number of European countries still cope with historically high unemployment rates. One line of research that has been followed to explain European unemployment and the differences among European countries is the impact labour market institutions. One important channel through which labour market institutions may affect unemployment is the responsiveness of wages to unemployment, commonly referred to as (real) wage flexibility. It has been shown that cross-country differences in labour market institutions can account for differences in wage flexibility, but there is not any consistent econometric work that explores the relationship between changes in labour market institutions and wage flexibility over time within countries. This is the issue addressed in this paper. Wage flexibility is defined as the coefficient on unemployment in a ‘bargaining-augmented’ wage equation, explaining (real) wage growth. We investigate the role of unemployment benefits in determining the degree of (real) wage flexibility. To this end we estimated a wage equation in a time-varying parameter framework for five core EMU countries. In Italy the unemployment benefit system is very limited. For the four other countries, the results show that, except for Belgium, wage flexibility is not related in a significant way to the generosity of the unemployment benefit system. This insight runs counter to the conclusions offered by cross-section studies. We therefore tentatively conclude that we should not be too optimistic about the effect of reform of the unemployment benefit system on wage flexibility and that such reform – in order to be really effective– should be radical.

Suggested Citation

  • PLASMANS, Joseph & MEERSMAN, Hilde & VAN POECK, André & MERLEVEDE, Bruno, 2002. "The unemployment benefit system and wage flexibility in EMU: time-varying evidence in five countries," Working Papers 2002020, University of Antwerp, Faculty of Applied Economics.
  • Handle: RePEc:ant:wpaper:2002020
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    Cited by:

    1. Ian Babetskii, 2006. "Aggregate Wage Flexibility in Selected New EU Member States," Working Papers 2006/1, Czech National Bank, Research Department.
    2. Carl Chiarella & Peter Flaschel & Peiyuan Zhu, 2003. "The Structure of Keynesian Macrodynamics: A Framework for Future Research," Working Paper Series 129, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    3. Kees Folmer, 2009. "Why do macro wage elasticities diverge? A meta analysis," CPB Discussion Paper 122, CPB Netherlands Bureau for Economic Policy Analysis.
    4. Mohsen Bahmani-oskooee & Massoumeh Hajilee, 2011. "How Fast Wages Adjust to Prices: A Multi Country Analysis," Economics Bulletin, AccessEcon, vol. 31(3), pages 2404-2413.
    5. Kees Folmer, 2009. "Why do macro wage elasticities diverge?," CPB Memorandum 224, CPB Netherlands Bureau for Economic Policy Analysis.
    6. Van Poeck Andrè & Veiner Maret & Plasmans Joseph, 2007. "Wage flexibility in the new European Union members: How different form the “old” members?," wp.comunite 0006, Department of Communication, University of Teramo.
    7. Erol Taymaz & Sule Ozler, 2004. "Labor Market Policies and EU Accession: Problems and Prospects for Turkey," ERC Working Papers 0405, ERC - Economic Research Center, Middle East Technical University, revised Mar 2004.

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