Labor costs convergence in manufacturing between North America and Western Europe, 1960-1991

Hourly labor costs in the manufacturing sector of seven EC countries, the USA and Canada are used to test the factor price convergence (FPC) by employing Johansen’s multivariate cointegration tests. We also examine if there is a two-way causality in wages between two groups of countries covered in this study. Both objectives are evaluated by developing error-correction models for Western Europe and North America. Our empirical findings provide support for the FPC and the existence of a long-run equilibrium cointegration relationship among labor costs in manufacturing. The estimation results of error correction models show that a feedback causality exists between manufacturing labor costs in North America and Western Europe.