Dependent Market Economies and Wage Competition in Central and Eastern Europe

Abstract

Wages in Eastern Europe are much lower than wages in Western Europe. The large differences remain also if we adjust for differences in price levels. This chapter assesses the extent to which wage differences between East European countries and Germany can be explained by differences in productivity and other economic fundamentals in individual countries. We compare the residual country effects on wages, including also effects of wage-setting institutions that remain once we control for labour force compositions and differences in economic structures. The negative country-wage effects in Eastern European countries, in fact, increase once we control for labour force compositions and differences in economic structures. We also decompose the returns effect for occupational groups and sectors, distinguishing the interaction between occupation and sectors and countries.