How Flexible are Real Wages in EU Countries? A Panel Investigation

34 Pages Posted: 13 Jul 2011

See all articles by Frigyes Ferdinand Heinz

Frigyes Ferdinand Heinz

European Central Bank (ECB)

Desislava Rusinova

European Central Bank (ECB) - Directorate General International and European Relations

Date Written: July 4, 2011

Abstract

In this paper we estimate the degree of real wage flexibility in 19 EU countries in a wage Phillips curve panel framework. We find evidence for a reaction of wage growth to unemployment and productivity growth. However, due to unemployment persistence, over time the real wage response weakens substantially. Our results suggest that the degree of real wage flexibility tends to be larger in the central and eastern European (CEE) countries than in the euro area; weaker in downturns than during upswings. Moreover, there exists an inflation threshold, below which real wage flexibility seems to decrease. Finally, we find that part of the heterogeneity in real wage flexibility and unemployment might be related to differences in the wage bargaining institutions and more specifically the extent of labor market regulation in different country groups within the EU.

Keywords: real wage flexibility, bargaining institutions, central and eastern Europe, euro area, panel heterogeneity

JEL Classification: J31, J38, P5

Suggested Citation

Heinz, Frigyes Ferdinand and Rusinova, Desislava, How Flexible are Real Wages in EU Countries? A Panel Investigation (July 4, 2011). ECB Working Paper No. 1360, Available at SSRN: https://ssrn.com/abstract=1878404 or http://dx.doi.org/10.2139/ssrn.1878404

Frigyes Ferdinand Heinz (Contact Author)

European Central Bank (ECB) ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
8219 (Phone)
6320 (Fax)

Desislava Rusinova

European Central Bank (ECB) - Directorate General International and European Relations ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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