CHAPTER 4 THEORETICAL FRAMEWORK, METHODOLOGY AND DATA ANALYSIS
The previous chapter covered the existing theoretical foundations and empirical literature, which emphasise wage-price and wage-price-productivity-unemployment relationships. Many studies in literature focus on these relationships using different techniques, different variables and, variable sample sizes, among other characteristics as demonstrated in the previous chapter. Generally, the results of these studies are not uniform over time, mainly, because of the fact that the methodologies applied have been dynamically time variant. The current chapter also discusses the theoretical framework of the study, thereby setting the stage for the development of the models used in this study. In addition, the theoretical framework also buttresses the justification given earlier for the wage-price-productivity-unemployment specification.
The current study uses VAR and SVAR methodologies together as the two perfectly complement each other. However, the study is not going to discuss the VAR methodology in detail, but only discusses it insofar as it relates to the SVAR methodology. It is argued that a VAR can be quite helpful in examining the relationship among a set of economic variables. The VAR methodology is quite useful for forecasting purposes, a function not performed by the SVAR methodology. Nonetheless, it should be emphasised that forecasting with a VAR is a multivariate extension of forecasting using a simple auto regression. The main criticism of the VAR approach is that it is devoid of economic content. The researcher does not invoke economic theory in order to specify the VAR model. The sole task of the economic researcher is to suggest appropriate variables to include in the VAR. From that point on, the procedure is almost mechanical. Since there is so little economic input in the VAR, it is not surprising that there is little economic content in the results. It has to be noted, however, that innovation accounting in VARs does require ordering of the variables, but the choice of the ordering is usually done in an ad hoc fashion (Enders, 2004: p.321; Misati et al., 2013: p.146).
In cases where a researcher wants to evaluate policy, they use SVAR, and this is because a structural VAR uses economic theory to sort out contemporaneous links among variables (Bernanke, 1986; Blanchard and Watson, 1986; and Sims, 1986). Enders (2004: p. 321) and Alessi et al. (2011: p.19-26) both argue that structural VARs require “identifying assumptions” that allow correlations to be interpreted causally. They also add that the identifying assumptions can cover the whole VAR so that all causal relationships in the model can be spelt out, or just a single equation so that we identify only a specific causal relationship. In addition, they also argue that this generates instrumental variables, which allow contemporaneous relationships to be estimated using instrumental variable regression. In this case, the ingenuity of a researcher is generally the only limitation as to the number of the structural VARs they can develop. Later sections of the chapter briefly discuss VARs and then explain their link with the SVARs.
Given this brief background on the VARs and SVARs, the purpose of this chapter is four-fold:
- to discuss the theoretical framework which paves the way for the development of the model used in this study,
- to present the methodology used in the current study
- to present a comprehensive explanation of the estimation techniques employed in this study, and,
- To analyse in detail sources of data and data generating procedures employed in the study.
The next section discusses imperfectly competitive wage-price models for LDCs incorporating productivity and unemployment. This is essential because labour markets in LDCs are imperfectly competitive, and so, these are the market structures, which are realistic to the LDCs.
WAGE-PRICE MODELS IN IMPERFECT COMPETITION
This section discusses four different theoretical wage-price models, which have been developed under imperfectly competitive market structure considered applicable to developing economies. This type of market structure is considered more realistic, especially, in developing countries where industries generally tend to be monopolistic, oligopolistic or imperfectly competitive. The cardinal reason for reviewing these theories is to try to understand all the policy and feedback variables that affect the wage-price relationship, which will eventually be utilised to come up with a small macro econometric model for Namibia
The new Keynesian wage-price model
The current model explains the relationship between equitable wages, prices that are sticky downwards, and co-movements in the growth of labour productivity and employment/unemployment. This model assumes that economy has infinitely lived households whose work effort supply show a relationship with the fair wage principle. In addition, the model also assumes that households consume goods and services, accumulate money and they are the ultimate recipients of the firms’ profits. Firms, in this case, operate in a monopolistically competitive market environment in which they use labour as the sole input; and they face a U-shaped (or quadratic) cost function of price adjustment in the intermediate goods sector. The other assumption is that labour productivity is stochastic and thus follows random walk process with drift. This model builds on the basic structure of the model developed by (Collard and de la Croix, 2000).
The households optimise the expected discounted utility function with respect to consumption , real money balances.
The current paragraph, tries to comment on the above specifications. As in Collard and de la Croix (2000) and Ball and Moffitt (2002), the logarithm employed in the effort function targets to simplify the solution of the models. Danthine and Donaldson (1990) and Danthine and Kurmann (2004) consider a more general effort function, which breaks down each parameter ( and ) into two: one concerning the wage and the other the employment (Bårdsen and Fisher, 1999).
Danthine and Donaldson (1990) introduce employment benefits in the current alternative opportunities. Collard and de la Croix (2000) believe that past alternative opportunities are part of the inter-temporal wage norm. Equation [4.5] represents the reference index of past wages, which corresponds to the particular case of habit formation studied by Collard and de la Croix (2000). It is worth noting that Ball and Moffitt (2002) also consider a habit formation process based on wage growth rather than on wage level considered in this study. Finally, contrary to Collard and de la Croix (2000), only a social norm case is studied and not a personal norm case where the presence of past wages is explicitly taken into account within the labour contract. In this case, past wages act as pure externality. To avoid household heterogeneity induced by the individual person’s history on the labour market, a perfect insurance market is assumed to exist (see Collard and de la Croix (2000)). The household’s revenue from the labour market is × . The household carries −1units of money and −1 bonds into period t and obtain the lump-sum transfer from the monetary authority and nominal profits from the intermediate goods producers. Households revenues are used to consume, purchase bonds, and store money.
The monetary authority
Since the focus is on the effects of technological shocks, the monetary authority is assumed to ensure constant money supply growth = −1. Theory also assumed that the newly created money is given to households in the form of transfers.
where denotes innovation to the productivity method as defined by equation [4.13]. Equation [4.18] denotes the labour market equilibrium condition: the current value of the log deviation of employment is a function of the wage, the wage standard and productivity growth. Equation [4.19] illustrates the law of motion of the wage norm. Equation [4.20] and [4.21] concern the supply and demand of for money respectively. Finally, Equation [4.22] is the Phillips curve.
This theoretical model has attempted to model wages, inflation, employment, labour productivity together with a monetary policy variable within the imperfectly competitive operating environment.
The competing-claims model of a unionised economy
The model discussed in this section is the competing-claims model of a unionised economy under imperfect competition that has been used in empirical work by some authors Bårdsen and Fisher (1999), Bårdsen et al. (2004), Bårdsen and Fisher (1999) and Bårdsen et al. (2007). This model, together with other models explained in subsequent sections, fittingly incorporate productivity and unemployment and, this helps in the specification proposed in this thesis. This model advocates that labour unions that represent workers request a certain real wage on behalf of the workers from employers and this is reflected in the way they peg their nominal wages. It also goes on to suggest that employers (firms) also seek a certain amount of real profit per worker and this is reflected in the way they set prices. This means that both firms and labour unions are ultimately concerned with real wage, which they can influence through adjustments to nominal wages and prices.
Thus, it is normal that workers develop expectations about the general price level over the period that correspond with their wage contracts. This, therefore, implies that the money wageworkers target in the long run solely depends on the degree of tightness of the labour market as indicated by the rate of unemployment in a country.
Bryson and Forth (2006) underscored the negative relationship between the current level of unemployment in the economy and the bargaining power of the workers. He contends that unemployment forces workers to be disciplined. This means that workers are willing to work for lower wages when unemployment is high compared to periods when unemployment is low and alternative job availability is high. Lindbeck (1993) proposed that, with reference to labour union models and insider-outsider theories, workers (insiders) are more likely to demand higher wages when the unemployment rate in the economy is low as compared to a situation when it is high. This because tight labour markets provide unions with a credible threat of industrial action if their demands are not met and the prospect to be rehired after losing one’s job, due to excessive wage demands is patently better in the former case. Furthermore, Carlin and Soskice (1990) contended that if tight labour market conditions coincided with a buoyant product market, as is usually the case, then firms are more than willing to go along with real wage increases than the risk of having a loss of production because of industrial action and being unable to accommodate escalating demand in the market. If the labour unions demand higher wages in the face of high unemployment like what is happening in South Africa and Namibia, then this is just a recipe for disaster as the unemployment problem is exacerbated.
Additional factors that affect the desired long-term wage of workers, which also affect their bargaining position for nominal wages, have been identified. One such factor is labour productivity, which has a favourable impact on the target for nominal wage as indicated by the insider-outsider theory and other theories that explain how workers share economic rent with firms (Lindbeck and Snower, 1986, 1987 and 1988; and Lindbeck, 1993). The efficiency wage theories propose a positive relationship between worker productivity and bargains for negotiate for higher nominal wages to realise their desired real wages. This is because firms are willing to agree to higher wage demands as this helps them reduce turnover costs (Salop, 1979), minimise shirking and quitting (Shapiro and Stiglitz, 1984) and uphold high quality worker selection.
TABLE OF CONTENTS
LIST OF TABLES
LIST OF FIGURES
CHAPTER 1 INTRODUCTION AND BACKGROUND
1.2 PROBLEM STATEMENT
1.3 the Objectives of THE STUDY
1.4 HYPOTHESeS OF THE STUDY
1.5 JUSTIFICATION OF THE STUDY
1.7 Outline of the study
CHAPTER 2 ECONOMIC AND LABOUR MARKET PERFORMANCE OF NAMIBIA
2.2 OVERVIEW OF THE ECONOMY OF NAMIBIA
2.3 THE NAMIBIAN LABOUR MARKET
2.4 THE INFLATIONARY ENVIRONMMENT IN NAMIBIA
2.5 CONCLUDING REMARKS
CHAPTER 3 MACROECONOMIC FOUNDATIONS AND LITERATURE REVIEW
3.2 Theoretical foundations of the wage-price models
3.3 THE WAGE-PRICE EMPIRICAL LITERATURE REVIEW
3.4 CONCLUDING REMARKS
CHAPTER 4 THEORETICAL FRAMEWORK, METHODOLOGY AND DATA ANALYSIS
4.2 wage-price models in imperfect competition
4.3 THE STRUCTURAL VECTOR AUTOREGRESSION METHODOLOGY
4.4 The SVAR model
4.5 IMPORTANT ISSUES IN ECONOMETRIC ESTIMATION
4.6 DATA DESCRIPTION AND ANALYSIS
4.7 CONCLUDING REMARKS
CHAPTER 5 THE SOURCES OF UNEMPLOYMENT FLUCTUATIONS
5.2 Unemployment in Namibia
5.3 Unemployment brief Literature
5.4 The unemployment model for Namibia
5.5 Data and Estimation Results
CHAPTER 6 THE SMALL MACRO-ECONOMETRIC MODEL FOR NAMIBIA
6.2 THE SMALL MACRECONOMETRIC MODEL FOR NAMIBIA
6.3 ESTIMATION AND ANALYSIS OF RESULTS
6.4The small maroeconometric model for Namibia
6.5 Validating the robustness of the models
6.6 CONCLUDING REMARKS
CHAPTER 7 CONCLUSION, POLICY IMPLICATIONS AND FUTURE RESEARCH
7.2 Summary of the study
7.3 Summary of empirical findings
7.4 Conclusions and Policy implications
7.5 Limitations of the study and areas of future research
GET THE COMPLETE PROJECT
A SMALL MACRO-ECONOMETRIC MODEL FOR NAMIBIA EMPHASISING THE DYNAMIC MODELLING OF THE WAGE-PRICE, PRODUCTIVITY AND UNEMPLOYMENT RELATIONSHIP