Hours or Heads? Demand Shocks and Labour Market Adjustments in Poland

This paper investigates the role of demand shocks in driving labour market dynamics in Poland, an economy that transitioned from very high to low and stable unemployment despite repeated adverse shocks. Our contribution is threefold. First, we propose two complementary sign-restricted Bayesian VAR models that distinguish between labour-extensive and labour-intensive aggregate demand shocks, where the former operate primarily through changes in employment, while the latter mainly affect workers’ effort and hours per worker. Despite different specifications, both models yield highly consistent results. Second, we find that labour-extensive demand shocks are a key driver of unemployment, labour-intensive demand shocks primarily affect output, prices, and productivity, whereas both shocks are similarly important for hours per worker. Third, we document that the relative importance of these shocks changes over time, suggesting that the dominant margin of labour market adjustment may depend on economic conditions and the policy environment.