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

Abstract

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 (France, Italy, UK, Netherlands, Poland, Hungary, Slovakia and the Czech Republic) with a view to assessing their suitability for Euro-area membership. It is found that for Hungary and the Czech Republic real wages are more responsive to real (permanent) shocks than some current members of the Euro zone, such as Italy. On the other hand, in Poland and Slovakia, real wage flexibility seems to be extremely low, making higher unemployment more likely than other EU countries and early euro-area membership unadvisable.