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Tyrväinen, T. (1995a). “Wage Setting, Taxes and Demand for Labour: Multivariate Analysis of Cointegrating Relations,” Empirical Economics, 20, 271–297.
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Prepared by Demosthenes N. Tambakis.
Underlying inflation is the annual growth rate of the CPI excluding indirect taxes and subsidies and capital costs of owner-occupied housing (Åkerholm and Brunila (1994)).
The tender rate, which is the BoF’s key monetary policy instrument, has been lowered seven times by a total of 250 points over the last nine months.
See Appendix II of “Finland—Recent Economic Developments” (August 21, 1995) and Tyrväinen (1995c) for a discussion of the wage bargaining process in Finland. The two-year wage agreement reached in October 1995 involves a nominal wage increase of 1.8 percentage points over the 12-month period from November 1, 1995, and an increase of 1.3 percentage points over the 12-month period from November 1, 1996. The agreement includes a clause related to wage differentiation, whereby annual wage increases may be reviewed in August 1996 in light of developments in wage drift. In addition, the following escalator clause is specified: if CPI inflation in the 11-month period from August 1995 to July 1996 exceeds 3.1 percent—an annualized rate of 3.4 percent—nominal earnings in August 1996 will rise by the full amount of the difference of the realized CPI inflation from 2.6 percent. Given recent weak inflationary pressures, it is unlikely that the clause will be triggered.
These data were provided by the BoF, which uses these time series in its macroeconometric model (see Bank of Finland (1990) for an earlier version of the model).
Nonwage labor costs are included separately; see below.
As measured by Statistics Finland.
The same problem was encountered by Ford and Krueger (1995) in the case of Italy.
The variance of a nonstationary series changes over time. In general, a data generating process is strictly stationary if all its moments are constant over time.
The output gap is computed as the ratio of actual to potential output; the latter was obtained using the Hodrick-Prescott filter.
An attractor is the space defined by the cointegrating relationship, to which the system will converge. This attractor may correspond to certain macroeconomic equilibria (see Engle and Granger (1991)).
It might seem that a measure of cyclical unemployment (such as the output gap) would be more appropriate than actual unemployment in explaining movements in real wages. Indeed, the concept of cyclical unemployment has been shown to yield a long-run Phillips curve for the United States and several European countries (Alogoskoufis et al. (1995)). In Finland, however, the severity of the recession of 1990–93 and the associated sharp rise in unemployment make it difficult to estimate potential output and the output gap (Andersen and Männistö (1995), Brunila (1996)). Actual unemployment thus seems to be the more appropriate measure.
This approach is also taken in Ford and Krueger (1995) and Pujol and Griffiths (1996).
An intercept is included in the cointegration test for the real wage. The t-statistics are not reported as the distributions of the estimated coefficients are nonstandard.
The tax wedge is defined as the difference between the relevant real wage for the employer (real labor cost) and the relevant real wage for the trade union (real take-home pay). It consists of income taxes, indirect taxes, social security contributions, and the difference between the consumer and producer price indices.
The considerable duration of the short-term effect is also found in the study by Symons and Robertson (1990) for 16 OECD countries. According to their study, a rise of 1 percentage point in the tax wedge on average leads to an immediate rise in real labor costs by one half of a percentage point, and about half of this effect remains after five years.
The control solution consists of the inflation time paths obtained by keeping the exogenous variables at their end-1995 levels over the forecast period, with the exception of productivity growth, whose growth rate was fixed at its end-1995 value.
Import price changes were introduced as an exogenous variable in the ECM but their effect was found to be insignificant.
With the exception of 1979, when it was just tinder 2 percent.