Exploiting a short run and long-run relationships between nominal wages, consumer prices, unemployment and labour productivity by application of VECM : evidence from Italy

Abstract

This dissertation aims to investigate and derive useful conclusions on a long run and short run relationships between the nominal wages and other selected variables, namely consumer prices, unemployment and labour productivity for Italy. The subject of this dissertation is somewhat related to evaluation of the implications of wage developments, particularly in terms of structure and correction of macroeconomic imbalances, since the way how macro variables interact with nominal wages in the economy play an important role for the design of both macroeconomic as well as wage-setting policies. Moreover, proper understanding of the relevant links and transmission channels in the economy uncovers key dynamic relationships between productivity, consumer prices, unemployment and nominal wages. The empirical analysis is based on wage equation which is estimated on quarterly time series data for the period from 2000Q1 to 2012Q4. The initial investigation reveals that all the original time series are non-stationary at levels and after first differencing are integrated of order one, or I(1). The findings from Johansen’s cointegration test show the presence of one cointegrating vector which, in turn, allows further modeling of the relationships using VECM. Final estimation of dynamic wage equation obtains evidence showing the response of nominal wages to main determinants such as price levels, labour productivity, unemployment, and that distinguishes between short and long-term dynamics. Overall important implications from this analysis are derived from the comparison with a priori expectations and the outcome from previous studies.