Wage led aggregate demand in the United Kingdom

The wage led aggregate demand hypothesis is examined for the United Kingdom over the period 1971–2007. Existing studies disagree on the aggregate demand regime for the UK, and this appears to be due to differing empirical approaches. Studies relying on equation-by-equation estimation procedures tend to find support for wage led aggregate demand in the UK, while the single study using a multiple time series estimation procedure finds no support for the hypothesis. We test the wage led aggregate demand hypothesis in the UK using VAR models estimated on quarterly data employing an alternative identification strategy based on shocks to real earnings. The results provide support for the wage led aggregate demand hypothesis during the period of study. However, the expansionary effects of higher earnings seem to be limited and relatively short-lived.