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WP 2019/4- Lajos Tamás Szabó: The Effect of Tightness on Wages at the Regional Level in Three Central European Countries

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In this paper, I examine the effect of tightness on wages in three Central European countries. The estimation is relevant for  at least three reasons. Firstly, it is a novel exercise to check the implication of the Mortansen–Pissarides model on Central  European data. Secondly, from the central bank’s perspective it is important to know the effect of tightness on wages, since  these are the major determinants of cost-push inflation. Thirdly, the magnitude of the spillover effect from tightness to wages  can help determine the efficiency of a targeted development policy. My contribution is directly identifying the effect of tightness  on wages from regional heterogeneity. I examine the effect of tightness on wages in Hungary, Slovakia and Poland using panel IV  method on district level data. The direct effects are similar in the three countries, i.e. there is a positive link between tightness  and wages. The magnitudes are somewhat different in Poland then in Hungary and Slovakia. There is spatial spillover effect in  Hungary but this indirect effect is missing in Poland and Slovakia.

Jel codes: J31, J61, J63, J64.

Keywords: local labour markets, labour market tightness, wage equation.

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