The changing relationship between productivity, wages and unemployment in the UK

This paper uses time series methods to analyse the changing relationship between unemployment, real wages and productivity. Most economic models of the labour market, such as bargaining, search, contract and efficiency wage theories, justify a relationship between these three variables. Only insider-outsider models cast doubt on any relationship at all between unemployment and wages. There is also some empirical evidence that real wages, productivity and the unemployment rate may be cointegrated in the UK. For example, Hall (1986) uses quarterly data from 1963 to 1984 to show that wages, prices, hours worked, productivity and unemployment form a cointegrated system, using the two-step procedure of Engle and Granger (1987). Cointegration implies at least one Granger causal ordering in the system (Granger, 1988) and it is these causal orderings that the present paper investigates.