Shocks and rigidities as determinants of the CEE labor markets’ performance. A panel SVECM approach

We analyze with panel SVECM the impact of real wage, productivity, labor demand and supply shocks on the eight CEE economies during 1996-2007. We use a set of long-run restrictions, derived from the DSGE model with explicitly modeled labor market, to identify these structural shocks. Fluctuations in foreign demand are controlled for. We find that the propagation of shocks on CEE labor markets resembles the one found for OECD countries. Labor demand shocks emerge as the main determinant of employment and unemployment variability in the short-run. The retrospective simulations of the model show that the wage adjustments were important factor behind the diverse labor market performance of the countries studied. Downward wage rigidities were especially binding after employment-contracting shocks in Poland, Czech Republic, Lithuania.