Are Labour Markets in the New Member States Sufficiently Flexible for EMU?

This paper investigates whether labour market in New Member States (NMS) are sufficiently flexible for early Euro adoption or further labour market reforms are necessary before EMU entry. Despite strong output growth in most NMS, labour market conditions are not improving and non-employment rates are large even by European standards. Nevertheless, postponement of Euro adoption is not advisable and may actually worsen labour market outcomes. We reach this conclusion in two steps. First, we argue that NMS display a fair degree of macroeconomic flexibility, as well as labour market flexibility. We also document that these countries exhibit wage bargaining institutions that are actually better equipped for microeconomic wage flexibility than in many current EMU Members. Second, we evaluate and discuss the responsiveness of employment to macroeconomic policies, focusing on jobless growth, a macroeconomic pathology that has recently hit the region. We show that jobless growth is associated to loose fiscal policies. Thus, Euro adoption and the associated fiscal tightening may actually be beneficial in labour market terms.