UNIT LABOUR COSTS AND PRICES: A SECTORIAL CAUSALITY ANALYSIS FOR THE SPANISH REGIONS

The aim of this paper is to carry out a sectorial causality analysis between prices and unit labour costs for the Spanish regions. In order to achieve our goal, we have developed our own database for the unit labour costs (ULC). It includes data for Spain and five of its regions: Andalusia, Cantabria, Extremadura, Navarra and the Basque Country, over the period 2000.I-2010.IV. The relationship between prices and ULC has been estimated within the framework of the mark-up model applying cointegration techniques. Based on the estimated model, we analyse the short and long run causality. Our results suggest that, in the long-run, causality runs from unit labour costs (ULC) to prices, but in the short-run this result doesn’t hold, actually in some cases the direction of causality reverses. More precisely, in regard to services, the results are very different depending on the regions. As far as the industry is concerned, there is growing evidence that the ULC are causing the prices. And, on the contrary, the results for the construction sector show that the prices are causing the ULC.