What drives the labour wedge? A comparison between CEE countries and the Euro Area

30 August 2015

We use a structural macroeconomic model with search and matching frictions on the labour market to analyse the differences in the business cycle fluctuations of the labour wedge between two CEE countries and the Euro Area. Our results indicate that the observed higher volatility of this wedge in the CEE region reflects mainly different characteristics of stochastic disturbances rather than country-specific features of the labour market. We also find significant differences in the sources of labour wedge fluctuations across the considered economies. While the labour wedge dynamics in Poland is to large extent explained by shocks originating in the labour market, most of its variations in the Czech Republic and in the Eurozone are attributable to changes in households’ preferences. Overall, our results suggest that labour market frictions in Poland are relatively more severe and generate fluctuations that are more harmful for social welfare.

keywords: labour wedge, search and matching frictions, business cycle, CEE countries
JEL codes: 
publication year: 2015
language: english
Publications category: 
publishing series: IBS Working Paper
publication number: 14/2015
ISSN: 2451-4373

Warsaw School of Economics

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