Causal Relationship between Wages and Prices in UK: VECM Analysis and Granger Causality Testing

27 Pages Posted: 14 Oct 2011

See all articles by Dushko Josheski

Dushko Josheski

University Goce Delcev

Darko Lazarov

University Goce Delcev

Risto Fotov

University Goce Delcev

Cane Koteski

University Goce Delcev

Date Written: October 13, 2011

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

JEL Classification: E24, J3,C22

Suggested Citation

Josheski, Dushko and Lazarov, Darko and Fotov, Risto and Koteski, Cane, Causal Relationship between Wages and Prices in UK: VECM Analysis and Granger Causality Testing (October 13, 2011). Available at SSRN: https://ssrn.com/abstract=1943624 or http://dx.doi.org/10.2139/ssrn.1943624

Dushko Josheski (Contact Author)

University Goce Delcev ( email )

Stip
Macedonia
+389 32 550 000 (Phone)
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HOME PAGE: http://www.ugd.edu.mk/

Darko Lazarov

University Goce Delcev ( email )

PO box 201
Stip, 2000
Macedonia
+389 550 317 (Phone)

Risto Fotov

University Goce Delcev ( email )

Stip
Macedonia

Cane Koteski

University Goce Delcev ( email )

PO box 201
Stip, 2000
Macedonia

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