Wage setting,taxes and demand for labour: Multivariate analysis of cointegrating relations

A 10-dimensional vector space is defined which is in accordance with a model of wage setting and demand for labour specified in a bargaining framework. Structural restrictions identifying the long-run relations of interest are specified. Restrictions which characterize wage-seting and labour demand schedules are imposed and tested, first separately and then jointly. The FIML procedure proposed in Johansen and Juselius (1990) is applied. Generally, restrictions satisfying the condition for formal identification pass the tests at a fairly high signficance level. The plausibility of resulting cointegrating relations applies not only to the signs but also to the magnitudes of the coefficients. The relations show up almost identically in partial and joint analysis. They do not appear to be sensitive to the choice between four or three cointegrating relations in the system. Finally, the relations are hardly influenced at all by alterative conjectures concerning endogeneity of various tax rates. The results indicate that there has been a considerable degree of real wage resistance in action in Finland.