Revisiting The Real Wages–Unemployment Relationship. New Results From Non‐Linear Models

We examine the long‐run real wages–unemployment relationship for five OECD countries over the period 1960:1–2001:4. Given the theoretical possibility of non‐linear equilibrium due to downward real wage rigidity we employ econometric tests that allow for the presence of non‐linearities in the long‐run equilibrium. We adopt the notion of ‘hidden co‐integration’ suggested by Granger and Yoon. This methodology has several advantages with respect to other non‐linear models. We find statistical evidence that, in general, there is a long‐run positive relation between real wages and unemployment only when both are affected by positive shocks. We also find a negative relationship between unemployment and productivity. The empirical analysis is complemented with the estimation of error correction models for all countries.