FLEXIBILITY OF REAL AND NOMINAL WAGES: CASE OF SELECTED WESTERN BALKAN COUNTRIES

Wage flexibility is considered to be a key determinant of labour market flexibility. In this paper flexibility of real and nominal wages in the group of Western Balkan countries as well as in selected New Member States (NMS) is explored by means of unrestricted vector autoregressive model. The main goal of this study was to identify whether selected Western Balkan countries show different behaviour with the respect to NMS considering the response of nominal and real wages to shocks. An unrestricted vector autoregressive model on the first differences of nominal and real wages was estimated and impulse response functions were derived to see which long run effects these shocks have. The data were taken from the WIIW Monthly Database, providing data on average gross monthly wages. The analysis is performed for the period from January 2004 to June 2015. The results of the conducted empirical analysis have shown that wage responses to shocks in the Western Balkan countries are in line with the magnitudes observed for the group of NMS or even better, nevertheless, there are some exceptions.