Small-system modelling of real wages, inflation, unemployment and output per capita in Italy 1970-1994

The relationships between real wages, output per capita, inflation and unemployment in Italy between 1970 and 1994 are modelled using a cointegrated vector autoregression. There is evidence of a change in the underlying equilibria and in the dynamic evolution of the variables, probably associated with the substantial changes in many sectors of the Italian economy after 1979. Alternative ways to model structural change in the Italian labour market are considered. In adopting a split-sample approach the results favour an hysteresis interpretation of unemployment. Copyright © 2001 John Wiley & Sons, Ltd.