Journal
ECONOMIC MODELLING
Volume 104, Issue -, Pages -Publisher
ELSEVIER
DOI: 10.1016/j.econmod.2021.105626
Keywords
Labour market institutions; Export-led growth; Political choice; Open economy
Categories
Funding
- National Science Centre of Poland [2015/17/D/HS4/00319]
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In Central Eastern European countries, there was a period of interesting labor market dynamics after the global financial crisis, characterized by increased labor market resilience, higher minimum wage levels, and stricter employment protection legislation. This suggests a degree of complementarity between worker-friendly legislation and minimum wage policies.
We construct a simple model of a small, open economy with two macroeconomic variables of interest, namely, wage and employment dynamics and two institutions, namely, employment protection legislation (EPL) and minimum wage level (MW). Using stylized facts about macroeconomic performance and labor market reforms in Central Eastern European countries (CEEC) and assuming that the government wants to maximize equilibrium payroll, we can reproduce interesting labor market dynamics in these economies similar to those observed after the global financial crisis (GFC). This includes increased labor market resilience coupled with an increase in MW level and an implicitly higher EPL, with a partial reversal of a secular trend toward temporary employment. We conclude that a degree of complementarity (or at least weakened substitution) exists between worker-friendly EPL and MW policies in the peculiar economic circumstances that CEEC found themselves in the years after the GFC. We call these circumstances a Goldilocks period for the labor market.
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