Employment and Labor Market Flexibility in the New EU Member States

Thomas Gruber ()
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Thomas Gruber: Oesterreichische Nationalbank, http://www.oenb.at

Focus on European Economic Integration, 2004, issue 1, 96-121

Abstract: On May 1, 2004, ten new Member States (NMS) entered the European Union (EU). Since the NMS are still in the midst of a transition and catching-up process, not only will they face asymmetric shocks, but; these shocks will be largely uncorrelated with those prevailing in EMU. Upon EU accession the NMS also; entered the monetary integration process, which ends with the adoption of the euro. This implies that; the NMS will relinquish autonomy over monetary policy and exercise restrictions on fiscal policy. According; to optimum currency area theory, in the absence of a national monetary policy flexible labor markets; become central to accommodating idiosyncratic shocks. This paper takes a look at the labor markets in; the NMS, focusing especially on labor market flexibility. The analysis show higher labor cost flexibility in; the NMS than in the EU in general. Supply-side flexibility, notably occupational and regional mobility,; seems to be lower. However, overall flexibility seems to be small or even insignificant. Thus, the paper; suggests that the NMS have to make further efforts to enhance labor market flexibility, especially; improving regional mobility and applying active labor market policies. With a view to further monetary; integration, early participation in the euro area may not be the optimal choice for some of the NMS.;

Date: 2004
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