190 G. P. Kouretas and L. P. Zarangas
the expected signs of the coefficients should be b
w
0, b
P
0, b
Q
0, b
ta
5 0, b
s
0, b
y
5 0, and possibly b
Pm
0. The impacts of both the income tax and the indirect tax derive from their wage
effect. If the union has a direct influence on employment for a given wage, then b
y
? 0. The restriction b
w
5 2b
P
5 2b
Q
5 b
s
. 0 implies that it is the real labor cost for a produced unit that is
important. Again, if it is the relative raw material price that is important, we write b
w
5 2 b
P
2 b
Pm
2 b
Q
5 b
s
. We concluded above that there are probably three cointegrating
vectors in our data space. Two of them are well specified, i.e., a wage-setting schedule and demand-for-labor condition. The third
eigenvector could describe either the demand side or the supply side of the variables concerned. Thus, we expect the following to
be possible candidates: 1 the supply of output, 2 the demand for output, 3 the constant mark-up pricing rule, and 4 price
setting conducted by the product-market demand conditions. How- ever, the resulting “semirelations” may also be mixtures of two
or more competing but misspecified relations. Hence, one should not put too much emphasis on the interpretation of the remaining
vectors. Table 4 introduces the three nonrestricted eigenvectors.
The strategy applied below is as follows. First, we do partial identification for each of the three vectors based on the wage setting,
demand for labor and the other “semirelations.” This sort of identification is done through the imposition of linear and homoge-
neous restrictions on each vector Johansen and Juselius, 1990, 1992. Second, following Johansen and Juselius 1994 and Jo-
hansen 1995a and the discussion in Section 3C, we provide formal identification of the joint hypotheses of the complete model.
5. TESTING STRUCTURAL HYPOTHESES
Table 4 introduces the estimates of the three nonrestricted coin- tegrating vectors obtained from the Johansen FIML technique.
The b
i
coefficients indicate the long-run relationships embodied in the eigenvectors. All coefficients are correctly signed, they have
reasonable magnitudes, and they are statistically significant. An interesting issue concerns how rapidly the long-run equilibrium
in the labor market is attained. This question is answered by the estimate of the matrix “error correction” terms a, which can be
considered as the speed of adjustment of each variable with respect to a disturbance in the long-run equilibrium. Table 4 also reports
the estimates of the cumulated innovations derived from the MA
WAGE SETTING, TAXES, AND LABOR IN GREECE 191
representation of the model. As is shown the innovations from the price level, the level of employment and the output have the
largest effect on the wage rate, while the effect of the degree of unionization is low.
We proceed by imposing restrictions describing long-run prop- erties that the vectors of interest are expected to fulfill. Short-
term adjustment to changes in the process and in the long-run steady states is determined freely. However, insofar as relevant
cointegrating relations with behavioral interpretation will be de- tected, we expect the error-correcting property to reveal them
even more clearly.
5A. Wage-Setting Schedule
First, we evaluate the two extreme hypotheses concerning the dominance of the bargaining parties and the tax incidence aug-
mented with the restriction b
N
5 2b
Q
, which makes productivity the driving force of real wages. We are unable to reject both
contradictory hypotheses. The hypothesis of union dominance with taxes fully borne by firms generates a x
2
statistic equal to 1.03, whereas the opposite hypothesis has a x
2
value of 5.09. Given this outcome, we proceed to test whether the absolute values of
the coefficients of l 2 t
a
, l 1 s, CPIP are equal in absolute value. This restriction was also accepted. Furthermore, column 2
indicates that the long-run homogeneity hypothesis between the real wage and productivity is rejected, and this result may be
attributed to the presence of a linear trend in the model. Finally, we impose the restriction for testing the degree of wage indexation
that is given in Equation 12. In column 1 it is shown that this restriction for the case of real wage resistance v 5 1 is accepted
and, therefore, it can be argued that the Greek labor market exhibits a considerable degree of real-wage resistance.
5B. Demand for Labor
The definition of the demand-for-labor schedule was given above. As is clear from Equation 2, the payroll tax is the only tax
factor included. Therefore, we should expect that b
ta
5 b
y
5 0. First, we test whether the hypothesis that in the long-run firms
operate on the labor demand curve holds if determinants of real labor cost are such that b
w
5 2b
P
5 b
s
. The above restrictions and the omission of union effects on employment are easily ac-
cepted, as shown in column 3. Thus, we argue that the demand
192 G. P. Kouretas and L. P. Zarangas
for labor is guided by real labor cost and the level of activity. However, the absolute values of elasticities with respect to both
these factors are significantly below unity, which would be ex- pected under simple Cobb-Douglas technology.
Given these findings, it appears that there is some evidence against the efficient bargaining model. In the right-to-manage
model 3 that we consider here, employment is determined by the profit-maximizing condition 2, which only includes variables
entering the profit function. In the efficient bargaining model the profit maximization condition is relaxed and employment is
defined in the bargaining solution. In this case, all variables enter- ing the game play a role in the determination of employment.
Thus, the determinants of profit enter the employment function significantly while other variables do not. This indicates that the
equilibrium level of employment is on the labor demand curve.
Column 4 indicates that the effect of real raw material prices does not differ significantly from zero. This finding leads to the
same conclusion that holds in several countries, as Hamermesh 1991 has shown. He argues that labor and energy are price
substitutes, with a very small crossprice elasticity, and thus it is not surprising that we were unable to distinguish an impact for
raw material prices on the demand for labor function. Finally, we impose the restriction that the output elasticity is equal to the
labor cost effect, and it is easily rejected.
5C. Output “Semischedule”
The cointegration results have shown that there is a third statisti- cally significant eigenvector. As we have explained, this vector
can capture elements of both the demand side and the supply side of the labor market. In column 5 we consider one possibility,
namely that the third vector resembles a demand-for-output sched- ule, and it is clear that we are unable to reject the required restric-
tions. However, given that the hypothesis for the Cobb-Douglas technology, b
N
5 2b
Q
is also accepted, this could also capture supply-side elements.
5D. Joint Hypotheses
The final step of our analysis is to provide tests of joint hypothe- ses for the complete system as was discussed in Section 3C. We
now test whether the restrictions imposed on each vector indepen- dently will be accepted simultaneously. This test is described in
WAGE SETTING, TAXES, AND LABOR IN GREECE 193
Johansen and Juselius 1994, and the results are given in Table 4. Because there is a large number of combinations that we could
make, we present here only the analysis of the full set of restric- tions. Thus, the first case is that we consider columns 1, 3, and 5,
and the second one refers to columns 2, 4, and 5. In both cases it is shown that we pass the test for overidentifying restrictions,
because the value of the likelihood ratio statistic Q with 16 degrees of freedom is equal to 11.59 and 10.45 in the first and second
cases, respectively, and therefore, we argue that the system of the three statistically significant vectors resembles the three long-run
relationships that we have considered, namely, the wage-setting schedule, the demand-for-labor schedule, and the output schedule.
6. CONCLUSIONS
