The Wage-Price Setting Behavior: Comparing The Evidence from EU28 and EMU

Adriatik Hoxha
JEL codes: 
C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models, E31 - Price Level; Inflation; Deflation, J31 - Wage Level and Structure; Wage Differentials.
The consensus of empirical evidence on the wage and price relationship reveals that causal relationships are difficult to identify. Moreover, elements other than wages, prices and productivity have significant impact in determining the wage-price setting equilibrium. Application of VECM analysis in the wage-price relationship for EU28 and EMU over the period 2000:Q1–2014:Q4 implies that there is statistically robust evidence of long-run cointegration relationship between wages and prices. Additionally, the estimated values of cointegration coefficients provide strong evidence in favor of hypothesis that assumption of near-rational behavior in the wage-price relationship is valid in case of EU28, whereas that of rational expectations is valid in case of EMU. Specifically, the evidence suggests that wage setters have under-adjusted for inflation as probably in their view the costs of such behavior were low. This can serve as an argument that wage and price setters have unconditionally accepted the strict rigor of monetary policy authorities. Such behavior can also be attributed to labor market flexibility which is a central element in determining the overall economic performance. In principle, wage moderations induced by a flexible labor market should improve and/or restore the international competitiveness and result in more output and employment in EU28 and EMU.
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