The relationship between inflation and unemployment: an empirical approach for the European Union countries

Abstract

The aim of the article was to prove the existence of an inverse relationship between the variables: unemployment and rate of wage growth. For this purpose, the Eurostat database and the Gretl and EViews 11 econometric programs were used. Then basic model was subjected to diagnostic tests to verify the appropriate estimator. The final model on the basis of which the relationship was described and conclusions were drawn is a model created using the Ordinary Least Squares. Estimation results indicated a negative relationship between the above‐mentioned variables. This relationship turns out to be significant. The results also showed a low fit with empirical data, which is justified due to the existence of other factors influencing the increase in wages over the years. Additionally, due to the fact that the relationship indicated by the model could not define causality, the Granger causality tests for panel data was also used. The results showed the existence of causality run one‐way from unemployment to the growth rate of wages variable. In the last part of the research, conclusions were drawn from the entire analysis including estimation of OLS and other tests.