Are Real Wages and Unemployment Related?

In this paper, the authors propose an alternative method for investigating the sources behind the behavior of real wages and unemployment. The model they study is a certain cointegrated VAR, a so-called common trends model, which has become increasingly popular in the empirical growth/business cycle literature. This model leads them to emphasize the distinction between long-run and short-run relations. Using quarterly Swedish data (1965-90), the authors find only weak evidence of a short-run relation between real wages and unemployment as reported in traditional single-equation,`error-correction models. There is even less evidence of a long-run relation. Copyright 1998 by The London School of Economics and Political Science