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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
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Handle: RePEc:cnb:wpaper:2012/01
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  1. 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.
  2. Tito Boeri & Herbert Brücker, 2005. "Why are Europeans so tough on migrants?," Economic Policy, CEPR;CES;MSH, vol. 20(44), pages 629-703, October.
  3. Jan Babecky & Philip Du Caju & Theodora Kosma & Martina Lawless & Julian Messina & Tairi Room, 2009. "Downward nominal and real wage rigidity : Survey evidence from European firms," Working Paper Research 182, National Bank of Belgium.
  4. Messina, Julian & Strozzi, Chiara & Turunen, Jarkko, 2009. "Real wages over the business cycle: OECD evidence from the time and frequency domains," Journal of Economic Dynamics and Control, Elsevier, vol. 33(6), pages 1183-1200, June.
  5. Alfonso Arpaia & Karl Pichelmann, 2007. "Nominal and real wage flexibility in EMU," European Economy - Economic Papers 281, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  6. Lünnemann, Patrick & Wintr, Ladislav, 2010. "Downward wage rigidity and automatic wage indexation: evidence from monthly micro wage data," Working Paper Series 1269, European Central Bank.
  7. Babetskii, Ian & Boone, Laurence & Maurel, Mathilde, 2004. "Exchange rate regimes and shocks asymmetry: the case of the accession countries," Journal of Comparative Economics, Elsevier, vol. 32(2), pages 212-229, June.
  8. Bertola, Giuseppe & Dabusinskas, Aurelijus & Hoeberichts, Marco M. & Izquierdo, Mario & Kwapil, Claudia & Montornès, Jérémi & Radowski, Daniel, 2010. "Price, wage and employment response to shocks: evidence from the WDN survey," Working Paper Series 1164, European Central Bank.
  9. Michael C. Burda & Jennifer Hunt, 2011. "What Explains the German Labor Market Miracle in the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 273-335.
  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, June.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
  15. 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.
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