Causal relationship between wages and prices in UK: VECM analysis and Granger causality testing

Dushko Josheski (), Darko Lazarov, Risto Fotov and Cane Koteski

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper the issue of causality between wages and prices in UK has been tested. OLS relationship between prices and wages is positive; productivity is not significant in determination of prices or wages too. These variables from these statistics we can see that are stationary at 1 lag, i.e. they are I(1) variables, except for CPI variables which is I(2) variable. From the VECM model, If the log wages increases by 1%, it is expected that the log of prices would increase by 5.24 percent. In other words, a 1 percent increase in the wages would induce a 5.24 percent increase in the prices.About the short run parameters, the estimators of parameters associated with lagged differences of variables may be interpreted in the usual way.Productivity was exogenous repressor and it is deleted since it has coefficient no different than zero. The relation (causation) between these two variables is from CPI_log→ real_wage_log .Granger causality test showed that only real wages influence CPI or consumer price index that proxies prices, this is one way relationship, price do not influence wages in our model.

Keywords: VECM; Granger causality; real wages; prices; cointegration; OLS (search for similar items in EconPapers)
JEL-codes: C22 E24 J01 (search for similar items in EconPapers)
Date: 2011-10-13
New Economics Papers: this item is included in nep-cis and nep-mac
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