The Balassa-Samuelson-Effect: ‚an Inevitable Fact of Life?’ - an Empirical Analysis of its Foundations on Goods and Labour Markets“
Researchers: Achim Schmillen and Richard Frensch
Funding: German Research Foundation (DFG)
Keywords: Inflation differentials and convergence / Central and Eastern Europe
Project duration: May 2008 - December 2010
The (former) transition countries that joined the EU in 2004 and 2007 are bound by contract to introduce the Euro. At the same time there are a number of obstacles concerning this. Thus, the inflation rate must not be too high compared to the EU countries with the lowest rate of price increases. The question arises whether a radical reduction of the inflation rates, which are rather high in some Central and East European states, is economically reasonable.
By far the most popular approach to explain "harmless" inflation differences is the so-called Balassa-Samuelson-Effect. Even though a large number of studies examines this effect for Central and Eastern Europe, it is neither theoretically nor empirically undisputed. Even its "co-discoverer" Paul Samuelson pointed out once that it is "not an inevitable fact of life".
For that reason Richard Frensch and Achim Schmillen from the Department of Economics, Migration and Integration of the Institute for East European Studies addressed some basic components of the Balassa-Samuelson-Effect. What role its implicit and explicit assumptions about goods and labour markets play was particularly examined. In this context, the assumption of homogenous labour markets, which is central to the Balassa-Samuelson-Effect, was examined by means of a macro-panel and also with the aid of micro data from the Institute of Employment Research Nuremberg. In none of both cases the assumption could be confirmed unconditionally. Moreover, it was shown that use of variety measures of foreign trade, which are by definition available only for tradable goods and at the same time proxies for productivity, leads to significant Balassa-Samuelson-Effects.
Publications
Frensch, Richard. Balassa-Samuelson, Product Differentiation and Transition. OEI-Working Paper No. 266, Institute for East European Studies Regensburg, November 2006.
Frensch, Richard and Achim Schmillen. The Penn Effect and Transition: The New EU Member States in International Perspective. OEI-Working Paper No. 295, Institute for East European Studies Regensburg, February 2011.
Frensch, Richard and Achim Schmillen. Can We Identify Balassa-Samuelson Effects with Measures of Product Variety? Economic Systems 35,1, March 2011.
Schmillen, Achim. Are Wages Equal Across Sectors of Production? A Panel Data Analysis for Tradable and Non-Tradable Goods. OEI-Working Paper No. 285, Institute for East European Studies Regensburg, June 2010.
Schmillen, Achim. The Exporter Wage Premium Reconsidered - Destinations, Distances and Linked Employer-Employee Data. Mimeo, Institute for East European Studies Regensburg, February 2011.