Modelling wages in centrally planned economies: The case of Poland

Abstract

The main idea developed in this paper is that rising excess demand for the labour force results in higher growth of wages over the ‘notional’ rate of growth. The rationale is that employees change their jobs searching for higher wages, and employers are willing to offer higher pay in order to get additional workers. This relationship is highly nonlinear, and can be regarded as an extension of the idea known as the Phillips curve to the area of ‘negative’ rate of unemployment. Additionally, one can observe that if the disequilibrium intensity in the labour market is small, its changes cause stronger reactions of wages in strategic branches than in the remaining sectors of the economy. It is similar to the situation of excess demand for labour. If there is a high rate of unemployment, reductions of wages affect more branches of secondary importance for the economy. The empirical investigation is based on Polish data covering the time period from 1964 through 1984. As excess demand for labour is unobservable, a proxy is used as an indicator of disequilibrium. It is introduced to the equation explaining the rate of growth of average wages, in addition to the rate of productivity growth of labour and the rate of inflation. Estimates are derived for 10 industry branches and sectors of the economy. The results confirm the initial hypothesis.