A central proposition in the Phillips curve view of the inflation process is that prices are marked up over productivity-adjusted labor costs. If that is true, then long-run movements in prices and labor costs must be correlated. If long-run movements in a time series are modeled as a stochastic trend, then the above noted implication of the 'price markup' view is related to the concept of cointegration discussed in Granger (1986), which says that cointegrated multiple time series share common stochastic trends. The evidence reported here shows that time series measuring rates of change in prices and labor costs are cointegrated. Furthermore, this cointegration appears consistent with Granger-causality running from the rate of change in prices to the rate of change in labor costs, but not vice versa as suggested by the 'price markup' view.
Our Research Focus: Labor Markets