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Modeling the time-series behavior of the aggregate wage rate

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  • Chan G. Huh
  • Bharat Trehan

Abstract

This paper looks at the time-series behavior of the real wage relative to that of productivity. Given an exogenous, nonstationary process for productivity, we use a simple model of dynamic labor demand to show that the real wage and the marginal product of labor will be cointegrated if the representative firm chooses the profit-maximizing level of employment. Data for the postwar period satisfy this condition. On the basis of this result we estimate a vector error correction model containing prices, wages, and productivity and examine the dynamic relationships among these variables. This specification provides a natural setting for looking at a number of issues of interest, including the role of the unemployment rate in the wage rate equation, issues of wage-price causality, and the effect of exogenous wage rate changes on productivity.

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Bibliographic Info

Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (1995)
Issue (Month): ()
Pages: 3-13

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Handle: RePEc:fip:fedfer:y:1995:p:3-13:n:1

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Related research

Keywords: Time-series analysis ; Wages;

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Cited by:
  1. Luojia Hu & Maude Toussaint-Comeau, 2010. "Do labor market activities help predict inflation?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 52-63.
  2. Robert W. Rich & Donald Rissmiller, 2000. "Understanding the recent behavior of U.S. inflation," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 6(Jul).
  3. Eswar Prasad & Alun Thomas, 1998. "Labour Market Adjustment in Canada and the United States," Canadian Public Policy, University of Toronto Press, vol. 24(s1), pages 121-137, February.
  4. Yash Mehra, 2000. "Wage-price dynamics : are they consistent with cost push?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 27-43.
  5. Yash P. Mehra, 1993. "Unit labor costs and the price level," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 35-52.

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