Bank of Lithuania

Determinants of unemployment in CEE-10 economies: The role of labour market institutions and the macroeconomic environment in 2002–2012


The view that an institutional structure causes rigidities in the labour market is broadly accepted by policy makers. This assessment is conventionally based on unemployment theories that establish a link between labour market institutions and unemployment in the long run. Empirical research engages in investigation of whether the theoretical link between unemployment and labour market institutions could be proved to prevail. This paper provides an econometric analysis of the determinants of unemployment in the long run in a set of Central and Eastern European countries for the period of 2002–2012. Evidence that an institutional structure causes rigidities in the labour market and has a direct effect on the unemployment rate in these economies is found in this study. A set of non-structural indicators, accounted by macroeconomic shocks, also prove to have effects on the labour market outcomes. From a policy making perspective, such implications suggest that structural labour market reforms and increases in the overall flexibility of the labour market in these economies are necessary to bring unemployment rates down.

JEL Codes: E02, J60.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

labour market institutions, unemployment, Central and Eastern European economies