Is There a Cointegrating Vector for UK Wages?

An understanding of the determination of real wages is crucial in analysing the determination of the natural rate of unemployment or NAIRU. Uses cointegration techniques to examine a core theoretical model of the long-run determinants of real wages involving unit labour costs, unemployment, union power and the replacement ratio. Considers the different measures of union power and the duration of unemployment and alternative specifications involving the “wedge” but a robust cointegrating relationship is not found. These results can be interpreted in several ways: concepts such as union power or the “generosity” of benefits may be measured inadequately; the theoretical understanding of the long-run determinants of real earnings may remain seriously incomplete; alternatively the short spans of data examined may be insufficient for the application of cointegration techniques, although the sample sizes examined here are fairly typical of most macroeconomic time series.