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The Relationship between Wages and Prices in Colombia

Author

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  • Julio, Juan Manuel
  • Cobo, Adolfo

Abstract

Due to the fact that many reliable indicators of further inflationary pressures do not seem to work anymore, finding whether or not wages Granger cause prices is an important concern for policymaking. However, international evidence on the relationship between wages and prices does not show strong evidence in favor of causation in the direction of prices. The results presented here for Colombian data point to the same direction. This paper differs from previous ones published in Colombia in two aspects. First, we include the Unit Labor Cost(productivity adjusted wages)as a more sensible measure of wages. Second, we base our analysis on a price markup expectations augmented Phillips curve in which we include indicators of aggregate demand and supply shocks, thus avoiding omitted variables bias in our inferences. We worked under alternative stationary/ non stationary VAR models. We found evidence in favor of Granger causality from prices to wages but no evidence of Granger causality in the direction of prices. These results hold only when unit labor cost is used as the wage indicator and under alternative measures of aggregate demand and under different assumptions on the integration properties of the series. The policy implication of these results point to the very careful use of wages as leading indicator of inflation.

Suggested Citation

  • Julio, Juan Manuel & Cobo, Adolfo, 2000. "The Relationship between Wages and Prices in Colombia," MPRA Paper 29069, University Library of Munich, Germany, revised 18 Jul 2000.
    • Handle: RePEc:pra:mprapa:29069
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    References listed on IDEAS

    as
    1. Chan Guk Huh & Bharat Trehan, 1995. "Modeling the time-series behavior of the aggregate wage rate," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13.
    2. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    3. Juan Manuel Julio R. & Javier Gómez P., 1998. "Output Gap Estimation, Estimation Uncertainty and its Effect on Policy Rules," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 17(34), pages 89-117, December.
    4. Mehra, Yash P, 1991. "Wage Growth and the Inflation Process: An Empirical Note," American Economic Review, American Economic Association, vol. 81(4), pages 931-937, September.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Jesus Otero & Manuel Ramirez, 2002. "On the determinants of the inflation rate in Colombia: a disequilibrium market approach," Borradores de Investigación 3296, Universidad del Rosario.
    2. M. A. Ivanova, 2016. "Analysis of the nature of cause-and-effect relationship between inflation and wage in Russia," Studies on Russian Economic Development, Springer, vol. 27(5), pages 575-584, September.

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    More about this item

    Keywords

    Inflation; Leading Indicators; Phillips curve;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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