A Dynamic Equilibrium between Inflation and Minimum Wages in Sri Lanka

S.P. Jayasooriya
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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

Margin: The Journal of Applied Economic Research, 2009, vol. 3, issue 2, 113-132

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.

Keywords: Dynamic Equilibrium; Inflation; Minimum Wage; Structural Change; Impulse Response; Sri Lanka; JEL Classification: B22; JEL Classification: C01; JEL Classification: C32; JEL Classification: O11 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:sae:mareco:v:3:y:2009:i:2:p:113-132

DOI: 10.1177/097380100900300202

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