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Productivity Shocks, Unemployment Persistence, and the Adjustment of Real Wages in OECD Countries

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Pascalau, Razvan

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Abstract

This paper applies a set of unit root and cointegration tests with non-linear error-correction mechanisms to a subset of the OECD countries to investigate the empirical conclusions of some of the labor market models in the literature. I generally find that the unemployment rate, productivity, and real wages have a unit root even if one controls for threshold effects. This finding justifies the use of a cointegration approach to assess the existence of a long-run equilibrium among the variables of interest. For roughly half of the OECD countries in the sample, the unemployment rate, real wages, and productivity trend together over time. For four countries (i.e, Germany, Japan, Sweden, and the US) the adjustment to the long run relationship appears mostly asymmetric. Also, an impulse response function analysis suggests that real wages and productivity adjust faster to the long-run equilibrium, while shocks to unemployment take longer to extinguish. Also, according to the sign of the shocks, the unemployment rates respond differently. These findings suggest that a proper analysis of the behavior of productivity, real wages, and unemployment should consider non-linear adjustment mechanisms to long-run equilibrium since a liner approach would be biased.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7222.

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Date of creation: 11 Jul 2007
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Handle: RePEc:pra:mprapa:7222

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Related research
Keywords: Unemployment Wages Collective bargaining Hysteresis

Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation

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  1. Dibooglu, Selahattin & Enders, Walter, 2001. "Do Real Wages Respond Asymmetrically to Unemployment Shocks? Evidence from the U.S. and Canada," Journal of Macroeconomics, Elsevier, vol. 23(4), pages 495-515, October. [Downloadable!] (restricted)
  2. Lindbeck, Assar & Snower, Dennis J, 1985. "Explanations of Unemployment," Oxford Review of Economic Policy, Oxford University Press, vol. 1(2), pages 34-59, Summer.
  3. Jaeger, Albert & Parkinson, Martin, 1994. "Some evidence on hysteresis in unemployment rates," European Economic Review, Elsevier, vol. 38(2), pages 329-342, February. [Downloadable!] (restricted)
  4. Olivier Blanchard, 2005. "European Unemployment: The Evolution of Facts and Ideas," NBER Working Papers 11750, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Jacobson, T. & Vredin, A. & Warne, A., 1993. "Are Real Wages and Unemployment Related?," Papers 558, Stockholm - International Economic Studies.
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  6. Song, Frank M. & Wu, Yangru, 1998. "Hysteresis in unemployment: Evidence from OECD countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(2), pages 181-192. [Downloadable!] (restricted)
  7. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," Working papers 427, Massachusetts Institute of Technology (MIT), Department of Economics.
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  8. Arestis, Philip & Mariscal, Iris Biefang-Frisancho, 2000. "Capital Stock, Unemployment and Wages in the UK and Germany," Scottish Journal of Political Economy, Scottish Economic Society, vol. 47(5), pages 487-503, November. [Downloadable!] (restricted)
  9. Mehra, Yash P, 1991. "Wage Growth and the Inflation Process: An Empirical Note," American Economic Review, American Economic Association, vol. 81(4), pages 931-37, September. [Downloadable!] (restricted)
  10. Enders, Walter & Falk, Barry, 1998. "Threshold-autoregressive, median-unbiased, and cointegration tests of purchasing power parity," International Journal of Forecasting, Elsevier, vol. 14(2), pages 171-186, June. [Downloadable!] (restricted)
  11. Enders, Walter & Granger, Clive W J, 1998. "Unit-Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(3), pages 304-11, July.
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  12. Hall, S G, 1989. "Maximum Likelihood Estimation of Cointegration Vectors: An Example of the Johansen Procedure," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 51(2), pages 213-18, March.
  13. Enders, Walter & Siklos, Pierre L, 2001. "Cointegration and Threshold Adjustment," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 166-76, April.
  14. Bruce Hansen, 1997. "Inference in TAR Models," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 2(1), pages 1-14. [Downloadable!] (restricted)
  15. Mitchell, William F, 1993. "Testing for Unit Roots and Persistence in OECD Unemployment Rates," Applied Economics, Taylor and Francis Journals, vol. 25(12), pages 1489-1501, December.
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  1. Christian Haefke & Marcus Sonntag & Thijs van Rens, 2007. "Wage Rigidity and Job Creation," Economics Working Papers 1047, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2008. [Downloadable!]
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