The Effect of Skill shortages on Unemployment and Real Wage Growth: A Simultaneous Equation Approach

This paper attempts to quantify the effect of skill shortages on the UK labour market by developing a simultaneous equation model of unemployment and real wage growth. The model is developed following a structural approach based on a priori economic information and is initially estimated using a two-stage least squares procedure. The model is also estimated using Zellner's seemingly unrelated regressions estimation technique, with similar results. It is shown that skill shortages have a positive effect on real wage growth and a negative effect on unemployment, with both these effects economically and statistically significant.