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Real Wage Flexibility in the European Union: New Evidence from the Labour Cost Data

  • Jan Babecky
  • Kamil Dybczak

This paper presents evidence on the extent of real wage flexibility in 24 EU member countries based on the Eurostat labour cost data covering 2000Q1-2010Q2. The term 'wages' refers, for brevity, to total hourly labour costs and their two main components, namely wages and salaries per hour, and non-wage costs. Following the structural VAR approach, real wage flexibility is measured as the responsiveness of real wages to real (permanent) versus nominal (temporary) shocks. The data shows that the impact of the 2008/2009 crisis on real wage adjustment has not been uniform across the sample countries, with some evidence for an increase in real wage rigidity. A strong negative correlation is observed between our aggregate measure of wage flexibility and both the ESCB Wage Dynamics Network firm-level survey estimates of downward real wage rigidity and the International Wage Flexibility Project microeconomic estimates of downward real wage rigidity. Finally, we find that institutional features of labour markets could help explain the variation in the results across countries; for example, stricter employment protection legislation and stronger presence of unions go hand in hand with higher real wage rigidity.

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Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2012/01.

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Date of creation: Jan 2012
Handle: RePEc:cnb:wpaper:2012/01
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  1. Bertola, Giuseppe & Dabusinskas, Aurelijus & Hoeberichts, Marco & Izquierdo, Mario & Kwapil, Claudia & Montornes, Jérémi & Radowski, Daniel, 2010. "Price, Wage and Employment Response to Shocks: Evidence from the WDN Survey," CEPR Discussion Papers 7706, C.E.P.R. Discussion Papers.
  2. Lawless, Martina & Babecký, Jan & Du Caju, Philip & Kosma, Theodora & Messina, Julián & Rõõm, Tairi, 2009. "Downward Nominal and Real Wage Rigidity:Survey Evidence from European Firms," Research Technical Papers 11/RT/09, Central Bank of Ireland.
  3. Vladislav Flek & Kamil Galuscak & Jaromir Gottvald & Jaromir Hurnik & Stepan Jurajda & David Navratil & Petr Mares & Daniel Munich & Tomas Sirovatka & Jiri Vecernik, 2004. "Anatomy of the Czech Labour Market:From Over-Employment to Under-Employment in Ten Years?," Working Papers 2004/07, Czech National Bank, Research Department.
  4. Julian Messina & Chiara Strozzi & Jarkko Turunen, 2009. "Real Wages over the Business Cycle: OECD Evidence from the Time and Frequency Domains," Working Papers 2009-02, FEDEA.
  5. Burda, Michael C. & Hunt, Jennifer, 2011. "What Explains the German Labor Market Miracle in the Great Recession?," IZA Discussion Papers 5800, Institute for the Study of Labor (IZA).
  6. Alfonso Arpaia & Karl Pichelmann, 2007. "Nominal and real wage flexibility in EMU," International Economics and Economic Policy, Springer, vol. 4(3), pages 299-328, November.
  7. Jarko Fidrmuc & Iikka Korhonen, 2006. "Meta-Analysis of the Business Cycle Correlation between the Euro Area and the CEECs," CESifo Working Paper Series 1693, CESifo Group Munich.
  8. Katharine G. Abraham & John C. Haltiwanger, 1995. "Real Wages and the Business Cycle," Journal of Economic Literature, American Economic Association, vol. 33(3), pages 1215-1264, September.
  9. Patrick Lünnemann & Ladislav Wintr, 2010. "Downward wage rigidity and automatic wage indexation: Evidence from monthly micro wage data," BCL working papers 48, Central Bank of Luxembourg.
  10. Thomas Hyclak & Geraint Johnes, 1992. "Wage Flexibility and Unemployment Dynamics in Regional Labor Markets," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number wfud, November.
  11. Kamil Galušèák & Daniel Münich, 2005. "Regional Wage Adjustments and Unemployment: Estimating the Time-Varying Wage Curve (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 55(1-2), pages 68-82, January.
  12. Ian Babetskii & Laurence Boone & Mathilde Maurel, 2004. "Exchange rate regimes and shocks asymmetry: the case of the accession countries," Post-Print halshs-00468626, HAL.
  13. Jan Babecký & Kamil Dybczak, 2008. "Real Wage Flexibility in the Enlarged Eu: Evidence From a Structural Var," National Institute Economic Review, National Institute of Economic and Social Research, vol. 204(1), pages 126-138, April.
  14. Gábor Kátay, 2011. "Downward wage rigidity in Hungary," MNB Working Papers 2011/9, Magyar Nemzeti Bank (Central Bank of Hungary).
  15. Tito Boeri & Herbert Brücker, 2005. "Why are Europeans so tough on migrants?," Economic Policy, CEPR;CES;MSH, vol. 20(44), pages 629-703, October.
  16. Holden, Steinar & Wulfsberg, Fredrik, 2009. "How strong is the macroeconomic case for downward real wage rigidity?," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 605-615, May.
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