The long‐run determinants of wages in the New Zealand labour market, 1965–1991

Abstract

Using the Johansen multivariate approach to modelling the long‐run model, a single stable cointegration vector was obtained covering the period 1965–1991. This is interpreted as the long‐run relationship determining wages, whereby increases in the capital‐to‐labour ratio and upward movement in the replacement ratio both increased the real product wage. Unemployment was found to be an important variable determining the long‐run wage, but since it enters the model in a log‐linear fashion it has a variable elasticity, such that for long periods when unemployment was low it had a relatively small impact in terms of reducing real wages. These results therefore suggest that real wage growth is determined by product market conditions through productivity and unemployment, although “supply‐side” disincentives are also important determinants of “wage‐push”. By extending the long‐run model to include short‐run dynamics, it is possible to estimate that when there are changes to the underlying equilibrium between rea...