Modelling Wages and Prices in Australia

Abstract

This paper estimates a simultaneous-equation model of wages and prices for Australia, underpinned by a competing claims framework of imperfect competition. Two separate cointegrating relationships for wages and prices are identified by imposing the economic hypotheses implied by the theory. The steady-state relationships for wages and prices are then embedded in a parsimonious, dynamic wage-price model. The final model is both simple and parsimonious and able to describe the process of wage and price inflation in Australia.