Employment and Labor Market Flexibility in the New EU Member States

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.;