172 G. P. Kouretas and L. P. Zarangas
1. INTRODUCTION
During the last decade econometrics of nonstationary variables has undergone a great deal of development, having as a starting
point the seminal paper of Engle and Granger 1987, which intro- duced the concept of cointegration and its relevance in investigat-
ing the existence of long-run relationships that are suggested by economic theory. Within the subject of labor economics, the issues
of wage determination and labor demand are often candidates for testing such kinds of long-run relations, and the relevant litera-
ture is therefore substantial.
In the present paper, wage setting and demand for labor in Greece are investigated, applying the Johansen FIML multivariate
cointegration methodology. In addition, we apply several recent developments that are associated with this approach. First, a for-
mal test developed by Paruolo 1996 is used to test for the pres- ence of I2 components in the multivariate framework. This test
is coupled with the roots of the companion matrix as suggested by Juselius 1995, and we are thus able to identify the order of
the system and the dimension of the cointegration space in a more precise way. Second, we pay particular attention to issues related to
identification of the system by imposing linear and homogeneous restrictions as suggested by Johansen and Juselius 1994 and
Johansen 1995b. Finally, three tests of parameter stability in VAR models proposed by Hansen and Johansen 1993 are ap-
plied to examine whether the rank of the cointegration space is sample independent, and if the estimated coefficients are stable
in recursive estimations. Therefore, we are interested in: 1 formal identification, which is related to the statistical model; 2 empirical
identification, which is related to the actual estimated parameters; and 3 economic identification, which is related to the economic
interpretability of the estimated coefficients of a formally and empirically identified model.
The rest of the paper is organized as follows. Section 2 intro- duces the economic model. Section 3 discusses the Johansen for-
mulation in the presence of I1 and I2 components, the identifi- cation of the long-run structure and the stability analysis. In
Section 4, an unrestricted VAR model derived from the theoretical considerations is specified, and the estimation of the model is
presented. In Section 5 we report the structural identification of the long-run relationships as well as further empirical results.
Section 6 provides our concluding remarks.
WAGE SETTING, TAXES, AND LABOR IN GREECE 173
2. THE ECONOMIC MODEL
Kategori