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Causal relationship between wages and prices in UK: VECM analysis and Granger causality testing

Author

Listed:
  • Josheski, Dushko
  • Lazarov, Darko
  • Fotov, Risto
  • Koteski, Cane

Abstract

In this paper the issue of causality between wages and prices in UK has been tested. OLS relationship between prices and wages is positive; productivity is not significant in determination of prices or wages too. These variables from these statistics we can see that are stationary at 1 lag, i.e. they are I(1) variables, except for CPI variables which is I(2) variable. From the VECM model, If the log wages increases by 1%, it is expected that the log of prices would increase by 5.24 percent. In other words, a 1 percent increase in the wages would induce a 5.24 percent increase in the prices.About the short run parameters, the estimators of parameters associated with lagged differences of variables may be interpreted in the usual way.Productivity was exogenous repressor and it is deleted since it has coefficient no different than zero. The relation (causation) between these two variables is from CPI_log→ real_wage_log .Granger causality test showed that only real wages influence CPI or consumer price index that proxies prices, this is one way relationship, price do not influence wages in our model.

Suggested Citation

  • Josheski, Dushko & Lazarov, Darko & Fotov, Risto & Koteski, Cane, 2011. "Causal relationship between wages and prices in UK: VECM analysis and Granger causality testing," MPRA Paper 34095, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:34095
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    References listed on IDEAS

    as
    1. Erica L. Groshen & Mark E. Schweitzer, 1994. "The effects of inflation on wage adjustments in firm-level data: grease or sand?," Working Papers (Old Series) 9418, Federal Reserve Bank of Cleveland.
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    5. Jack Strauss & Mark E. Wohar, 2004. "The Linkage between Prices, Wages, and Labor Productivity: A Panel Study of Manufacturing Industries," Southern Economic Journal, Southern Economic Association, vol. 70(4), pages 920-941, April.
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    More about this item

    Keywords

    VECM; Granger causality; real wages; prices; cointegration ; OLS;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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