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

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  • Małgorzata Skibińska

Abstract

We use a structural macroeconomic model with search and matching frictions on the labour market to analyse the differences in the business cycle fluctuations 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 reflects mainly different characteristics of stochastic disturbances rather than country-specific features of the labour market. We also find significant differences in the sources of labour wedge fluctuations 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 fluctuations that are more harmful for social welfare.

Suggested Citation

  • Małgorzata Skibińska, 2015. "What drives the labour wedge? A comparison between CEE countries and the Euro Area," NBP Working Papers 220, Narodowy Bank Polski.
    • Handle: RePEc:nbp:nbpmis:220
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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