Wage and Price Level Determination

The behaviour of the price level has received considerable empirical interest in the last seven or eight years. This is in marked contrast with the discussion which took place prior to the event of the Phillips curve, when the arguments were largely conducted in a priori terms perhaps spiced with some occasional statistics. The empirical work has been mostly related to the United Kingdom and the United States; little research had been undertaken for Canada until recently.2 Besides producing additional evidence for or against theoretical hypotheses, the construction of a Canadian model is clearly necessary for the purpose of providing a guide to economic policy. In order to investigate the short-term lag structure of the inflationary process the empirical model employed here is on a quarterly basis; the statistical data cover 64 observations from 1947 to 1962. The other main characteristic of the model is that it takes account of the simultaneity in the determination of wage and price levels. The consideration of only one half of a simultaneous relationship creates well-known statistical problems in the estimation procedure. But aside from questions of statistical theory, a one-sided view of an interrelationship may lead to incorrect policy conclusions. For example, if a policy recommendation is to be made regarding the trade-off between wage change and unemployment on the basis of an estimated Phillips curve, one obviously has to know the extent of interdependence of the wage and price levels. The model is oriented towards general types of economic policy regarding the level of employment, the rate of inflation and wagerestraint. It is thus -not designed to give a verdict on a number of controversial issues concerning the significance of cost-push or demand-pull inflation, administering pricing, pattern bargaining, etc. In an attempt to assess the influence of labour unions on the adjustment of the labour market, the economy is, along broad industrial I This paper is based on my Ph.D. thesis written at the London School of Economics and Political Science. The supervisors were Professors A. W. Phillips and R. G. Lipsey; the debt to one's supervisors cannot adequately be evaluated with the measuring rod of words. I am grateful to Professor J. Durbin for the opportunity of using his newly developed method of deriving full information maximum likelihood estimates. I am also indebted to the Research Techniques Division at the L.S.E. and the Institute of Computer Science of the University of London for aid with the computer work

Aside · Econometrics · Economics · Empirical research · Estimation · Labour economics · Macroeconomics · Order (exchange) · Phillips curve · Simultaneity · Statistics · Unemployment · Wage · Economic Theory and Policy · Mathematics · Modeling, Simulation, and Optimization

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