Labor Market Frictions in the Czech Republic and Hungary

The goal of this paper is to investigate and compare the structural and dynamical characteristics of the Czech and Hungarian economy. The focus lies mainly on the examination of the development of key labor market variables. We also want to capture the changes that occurred due to the Great Recession in 2008. We estimate a DSGE model with search and matching frictions, price and wage rigidities and hiring costs. The monetary authority sets the nominal interest rates according to a Taylor-type rule. The wages setting mechanism and hours worked are the result of the Nash bargaining process. This model is estimated for the quarterly data of the Czech Republic and Hungary for the period 2001Q2 - 2014Q4. The results show that the reactions of variables to monetary shock are larger in the Czech Republic. This suggests that the monetary policy is less efficient in Hungary during the examined period. The bargaining power of workers is stronger in the Czech economy. This coefficient is smaller in Hungary, which is in line with the low trade union participation of workers. The model shows the preference, foreign and disutility from work shocks to be the main cause of the Great Recession in both countries.