Academic journal article Journal of Economic and Social Development

Labour Productivity, Real Wages and Unemployment: An Application of Bounds Test Approach for Turkey

Academic journal article Journal of Economic and Social Development

Labour Productivity, Real Wages and Unemployment: An Application of Bounds Test Approach for Turkey

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1.INTRODUCTION

The relationship between productivity, real wages, and unemployment has been considered as one of the important issues in the economics literature. In macroeconomic perspective, with the effect of globalization and openness of countries to international trade, the growth of productivity and wages become crucial factors, which decide the international competitiveness between countries. The increase in productivity and competitiveness induces economic growth. This is especially true for the countries that are able to increase their welfare by the job creation concomitant with the economic growth. On the other side, there are many empirical studies that analyze the relationship between productivity-real wages and productivity-real-wage inflation rate. However, there are a few studies that examine the interrelationships among productivity, real wages, and unemployment. In this context, Alexander (1993) investigated the relationship between productivity, wages, and unemployment in the United Kingdom for the period 1955-91 by employing the cointegrating VAR methodology and the Granger causality. After finding the evidence of a structural break in 1979, the author divided the sample into two subperiods and stated that 'before 1979 unemployment is the central variable, being caused by both wages and productivity'; while after 1979 there is 'a strong bivariate causality between wages and productivity'. She related this shift to a change in the policy environment introduced by the then Prime Minister Margaret Thatcher. Wakeford (2004) also analyzed the relationship between productivity, real wages, and unemployment in South Africa by using cointegration and the Granger causality tests.

The quarterly data comprise from 1983:Q1 to 2002:Q4. After finding evidence of a structural break in 1990, Wakeford divided the sample into two subperiods and found a long-term equilibrium (cointegrating) relationship between the real wages and productivity for the two sub-periods. The results indicate that productivity has grown faster than real wages.Pazarlıoğlu and Çevik (2007) analyzed the relationship between productivity, real wages, and unemployment in Turkey by employing cointegration and causality tests for the period of 1945-2005. After finding evidence of a structural break in 1967, they also divided the sample into two subperiods and found the unemployment rate as the central variable being caused by both the wages and productivity rate for the period of 1945-1966. However, a unidirectional causality running from the unemployment to productivity and a bi-directional causality between the productivity and real wages were found for the period of 1969-2005, and then productivity became a central variable for the period of 1969-2005. They related this shift to a change in the competition of international trade through the impact of globalization, especially after the 1980s. Yusof (2007) examined the long-run and dynamic behaviors of real wage-employment-productivity relationship for the Malaysian manufacturing industry over the period of 1992:Q1- 2005:Q3. His findings indicate a long-run relationship between the variables. The theory that real wages inversely affect employment was not supported, while the performance-based pay scheme theory (but not the efficiency wage theory), was validated. Following the previous studies, the main objective of this one was to measure the relationship between average labor productivity, real wages, and the unemployment rate in Turkish manufacturing industry by using the autoregressive distributed lag (ARDL) approach to cointegration analysis and TodaYamamoto's (1995) causality tests. The quarterly dataset covers the period of 2007:01-2016:04. This study differs from the earlier ones in two ways. Firstly, an alternative cointegration and causality approach is used to test the relationship between the variables. Secondly, on the basis of empirical testing, this study attempts to shed some light on the labour market theories that dominate the Turkish manufacturing industry at present. …

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