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A Dynamic Equilibrium between Inflation and Minimum Wages in Sri Lanka

Author

Listed:
  • S.P. Jayasooriya

    (The author is a Research Fellow at the Department of Agricultural Economics and Business Management, Faculty of Agriculture, University of Peradeniya, Sri Lanka; e-mail: jayasooriyasp@yahoo.com)

Abstract

This paper explores the dynamic equilibrium between minimum wages and inflation in Sri Lanka. From a theoretical perspective, while minimum wages tend to be sluggish in the economy, changes in price levels are compulsive. This empirical investigation which includes causality, co-integration and error correction models, reveals the existence of a long-term equilibrium relationship between minimum wages and inflation, and a one-way causality between the two variables. An interruption in equilibrium leads not only to a significant adjustment process but also to structural changes in long-run equilibrium. Finally, macroeconomic stability is established through the impulse response function in a situation, where shocks are applied to both minimum wages and inflation. The study recommends policy-making entities contemplate a minimum wage adjustment process in a climate of unstable inflation.

Suggested Citation

  • S.P. Jayasooriya, 2009. "A Dynamic Equilibrium between Inflation and Minimum Wages in Sri Lanka," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 3(2), pages 113-132, April.
    • Handle: RePEc:sae:mareco:v:3:y:2009:i:2:p:113-132
    DOI: 10.1177/097380100900300202
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    References listed on IDEAS

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    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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