Future EMU Membership and Wage Flexibility in Selected EU Candidate Countries

A Strategy for EMU Enlargement

“…The Single European Market involves free movement of labor between member states (MS), 15 although the actual cross-country labor mobility is far from being perfect. However, internal labor mobility (particularly geographical) within most EU countries is also highly imperfect due to numerous labor market rigidities (see Radziwill and Walewski, 2003). So the actual EU picture (including NMS) is far from that originally assumed by Mundell (1961), i.e.…”

“…full domestic mobility and full external immobility of production factors. Radziwill and Walewski's (2003) empirical research shows that, generally, nominal wages in NMS are not downwardly flexible, although the degree of rigidity differs between countries. Lithuania is the only exception, demonstrating some nominal flexibility in its wage setting.…”

“…Neither the transitioninduced output decline nor the ensuing recovery have followed business cycle patterns in the EU economies. In addition, changes in employment did not fully follow changes in output dynamics because, again, of deep restructuring and, to some extent, because of labor market rigidities (see Radziwill and Walewski, 2003). Furthermore, it is very difficult to find evidence of any business cycle (in its classical meaning) in most of transition economies, at least until the end of 1990s.…”

“…Fast productivity growth in NMS is another mechanism, which allows for adjustment even when nominal wages cannot be easily cut (see Radziwill and Walewski, 2003). Whether introducing the Euro and ultimate giving up the possibility of competitive devaluation will further boost productivity growth remains an open question.…”

How flexible are real wages in EU countries? A panel investigation

“…The sign of the expected effect on real wages is ambiguous. The depreciation of the domestic currency would lead to upward pressure on nominal wages in the wage negotiations as the cost of living increases due to the rising import prices (Radziwill and Walewski 2006). However, as the CPI inflation term corrects for the increase in cost of living, the remaining effect depends on how fast and fully nominal wages can adjust to match this increase.…”