An investigation into the sources of fluctuation in real and nominal wage rates in eight EU countries: A structural VAR approach

This paper uses the SVAR approach to assess the degree of labor market flexibility, measured as the responsiveness of real and nominal wages to permanent and temporary shocks, in eight EU member states. Four are Western European countries, i.e., France, Italy, UK, and the Netherlands, and four are new members from Central Europe, i.e., Poland, Hungary, Slovakia and the Czech Republic. We assess the suitability of the latter for Euro-area membership. For Hungary and the Czech Republic, we find that real wages are more responsive to real (permanent) shocks than in some current members of the Euro zone, e.g., Italy. In contrast, real wage flexibility is extremely low in Poland and Slovakia so that higher unemployment is more likely in these countries than in other EU countries. Hence, early Euro-area membership is unadvisable for these two countries. Journal of Comparative Economics 34 (2) (2006) 357-376.