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What drives the labour wedge? A comparison between CEE countries and the Euro Area

Listed author(s):
  • Malgorzata Skibinska

We use a structural macroeconomic model with search and matching frictions on the labour market to analyse the di?erences in the business cycle ?uctuations of the labour wedge between two CEE countries and the Euro Area. Our results indicate that the observed higher volatility of this wedge in the CEE region re?ects mainly di?erent characteristics of stochastic disturbances rather than country-speci?c features of the labour market. We also ?nd signi?cant di?erences in the sources of labour wedge ?uctuations across the considered economies. While the labour wedge dynamics in Poland is to large extent explained by shocks originating in the labour market, most of its variations in the Czech Republic and in the Eurozone are attributable to changes in households’ preferences. Overall, our results suggest that labour market frictions in Poland are relatively more severe and generate ?uctuations that are more harmful for social welfare.

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Paper provided by Instytut Badan Strukturalnych in its series IBS Working Papers with number 14/2015.

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Length: 29 pages
Date of creation: Sep 2015
Handle: RePEc:ibt:wpaper:wp142015
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