We study the impact of real wage, productivity, labour demand and supply shocks on eight Central and Eastern European (CEE) economies from 1996–2007 with a panel structural vector error correction model. A set of long-run restrictions derived from the dynamic stochastic general equilibrium (DSGE) model is used to identify structural shocks, and fluctuations in foreign demand are controlled for. Labour demand shocks emerge as the main determinant of employment and unemployment variability in the short-to-medium run, but wage rigidities were equally important for observed labour market performance, especially in Poland, Czech Republic and Lithuania. We associate these rigidities with collective bargaining, minimum wage, active labour market policies, and employment protection legislation.
