The relationship between inflation and wage growth in the Irish economy

This paper tests for the long-run and short-run relationship between prices and wages in the Irish economy over the 1975-92 period. Using recent econo metric techniques in the analysis of time series, we conclude that there is a long-run equilibrium relationship between prices, wages and an excess de mand variable in agreement with the expectations-augmented Phillips curve t heory of inflation. Making use of error-correction equations in order to st udy the short-run dynamics, we find that the long-run relationship between prices and wages is due to Granger causality running from wage inflation to price inflation. In addition, the predictive ability of excess demand is w eak with respect to wage inflation but very strong with respect to price in flation. These results imply (a) relatively strong evidence in favour of a mark-up price equation consistent with the expectations-augmented Phillips curve theory of inflation, and (b), very weak evidence for the predictive p ower of past inflation and the output gap for wages, i.e., a wage-type Phil lips curve effect. In other words, the results provide strong support for t he claim that inflation in Ireland has cost-push elements and very weak sup port for the existence of demand-pull elements.