Wage equations in macro models. Phillips curve versus error correction model determination of wages in large-scale UK macro models

Abstract

In this article the implications of implementing either a Phillips curve or an Error Correction type of wage equation in macro models are investigated. First the implications in an small theoretical model is studied. Secondly, stylized wage equations of the two types is implemented in two large scale UK macro models (1{M Treasury and Bank of England) and the multipliers are studied. The exercise highlights some =desired properties with the rest of the macro models and the results shows large differences in responds depending on the rest of the macro model. Generally a Phillips curve wage determination seems to make the reactions more unstable than an ECM type of wage formation.