Wage formation and employment in a cointegrated VAR model

Abstract

This paper uses a general equilibrium, monopolistic competition model of wage bargaining between trade unions and firms to derive two steady state relations which are estimated within a cointegrated VAR framework using quarterly Danish data. The first coin-tegrating relation is the marginal productivity condition for labour, derived from profit max-imization of firms who face a downward sloping demand curve for their product. The second cointegrating relation is a real wage relation, derived from the bargaining between trade unions and firms over wages, in the right-to-manage manner. The theoretical model is not rejected and the model displays parameter constancy throughout the estimation period and is able to forecast out-of-sample.