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R. Lipsey - The Relation Between Xxx Further Analysis

R. Lipsey - The Relation Between Xxx Further Analysis

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The Suntory and Toyota International Centres for Economics and Related Disciplines
The Relation between Unemployment and the Rate of Change of Money Wage Rates in theUnited Kingdom, 1862-1957: A Further AnalysisAuthor(s): Richard G. LipseySource:
Economica,
New Series, Vol. 27, No. 105 (Feb., 1960), pp. 1-31Published by: Blackwell Publishing on behalf of The London School of Economics and PoliticalScience and The Suntory and Toyota International Centres for Economics and RelatedDisciplinesStable URL:
Accessed: 19/11/2008 10:10
Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available athttp://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unlessyou have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and youmay use content in the JSTOR archive only for your personal, non-commercial use.Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained athttp://www.jstor.org/action/showPublisher?publisherCode=black .Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission.JSTOR is a not-for-profit organization founded in 1995 to build trusted digital archives for scholarship. We work with thescholarly community to preserve their work and the materials they rely upon, and to build a common research platform thatpromotes the discovery and use of these resources. For more information about JSTOR, please contact support@jstor.org.
The London School of Economics and Political Science
,
 Blackwell Publishing
,
The Suntory and Toyota International Centres for Economics and Related Disciplines
are collaborating with JSTOR to digitize,preserve and extend access to
 Economica.
http://www.jstor.org
 
1960]
The Relation betweenUnemployment and theRateofChange ofMoney WageRatesintheUnited Kingdom,1862-1957:AFurtherAnalysis'
ByRIcHARDG.LiPSEYInanearlier paperinthis journal, Professor Phillips2 has advancedthe hypothesis that the percentagerate of change of money wage ratesin the United Kingdom (W) can be explained to a very large extentby: (i)thepercentageofthe labourforce unemployed (U), and (ii) therate of changeofunemployment (U).After an inspection of the data,Phillips concludednotonly thatthere isaclearly observable relation-shipbetweenthese variables, butthatthe form oftherelationshiphas been remarkably stable overa period of almost one hundredyears.ThepurposeofthepresentpaperistoreconsiderPhillips'work in some detail. In particular it seemed necessary: (i)toconsiderthegeneral theoreticalmodel that is being tested; (ii)toquantify Phillips' results, determining,if possible, the proportionofthe variance in money wage ratesthat is associated with thetwovariables, level of unemployment (U) and rate of change of unemploy-ment(U); (iii)toprovide systematic testsofthevarioussubsidiaryhypothesesframedby Phillipsduring the courseofhisanalysis;and(iv) to test hypotheses that followfrom possible alternative models.The logical order in which to dealwith these topics, in the absenceofPhillips' paper,wouldbe, first,tooutline the phenomenawhichrequire explanation, then to developa model which will explain thephenomena, and, finally,totestfurther implicationsofthemodel.GivenPhillips' paper, however, aslight changeofapproachseemstobedesirable.Inthe firstsectionof this paper a reportisgivenofthestatisticalanalysis carried outon data for the period1862-1913.Although themainpurpose is to discover what phenomena requireexplanation, aratherelaborate treatment is requiredinordertotestthe hypothesesaboutthese phenomenaframed by Phillips. Thisis
I
The presentpaper, ikeProfessorPhillips', s a part of awider researchprojectfinanced by the Ford Foundation.The writer was assistedby Mr. PeterLantosand Mrs. June Wickins.This paper was the subjectof extendeddiscussion at theLSE Staff Seminaron Methodologyand Testing in Economicsand I am indebtedto all the members or manycommentsand suggestions; Ialsobenefitedrom thediscussion at the Universityof ManchesterAdvanced EconomicsSeminar wheresome of the materialembodiedn this paper was first presented.Mr. F. BrechlingandDr.S.F.Kaliski have given valuablecriticismsand I am particularly ndebtedtoProfessorPhillips forhis constant aid andencouragement.
2A.
W. Phillips,"The Relation Between Unemployment ndthe Rate ofChangeof Money Wage Rates inthe United Kingdom, 1861-1957", Economica,Nov.
1958.
A
 
2ECONOMICA[FEBRUARY
necessary inorder to build upa clearpicture of ourexplicanda.Althoughmany of Phillips'subsidiaryhypothesesarerejected, thedata areshown tosupportPhillips' maincontention thatthere is asignificantrelationbetween therate ofchange ofmoney wage ratesandthe leveland therateofchangeofunemployment.Havingestab-lished the evidence fortheserelations, the secondsection isdevotedtotheconstruction of atheoretical modelwhichadequatelyaccountsforthem. Phillips hadgivenvery littleindication ofthe sortofmodelofmarketbehaviour whichwouldproducehispostulatedrelations.Thethird section isdevoted to ananalysisof the datafor the post-1918period. Thetheorydevelopedin SectionIIisparticularlyusefulininterpretingthe differenceswhich occurbetweenthe relationsexistinginthenineteenthcentury andinthetwentiethcentury.I
TiHPERIOD1862-1913
1. Therelation betweentherateof changeofmoney wagerates(W)and the levelof unemploymentU)1TheunemploymentfiguresusedbyPhillipsshowedthepercentageofthe unionized labourforceunemployed,whilethefiguresfortherate ofchangeofwagerates werecalculated2fromthePhelpsBrown-Hopkinsindex.3
ul0
l 6
-18 79w
OD10l722
~
1UNEMPLOYMENTU(U)ZF
73
04
w
~~~70
0 cx
~~~7
9 10
II~
ULLI 0a2
Z
*-2
-76679TIME7478
U.
Figi.
P1gF
2.
I
Sincethe levelofunemploymentisuncorrelated with therate oft changeofunemployment,as isanytrend-freevariable withitsownrateofchange, the relationbetween the rateofchangeofmoney wagesandeachoftheindependentvariables,UandU,canbeconsideredseparately.Theactualr2forU and Uis0002.
2
Phillips, ibid., p. 290,n.I,took halfth-e irst centraldifferences (W+1-W-I.2)asthe best approximation to theabsoluterate ofchangeofwages.Theargumentforapproximatinga continuous derivativebythismethodrather thanby themoreintuitively plausiblemethod oftakingthe differencebetween thisyear's wageindexand lastyear's (Wt-Wt-1)can best beexplained byreference to thediagram.Fig.Ishows a continuoustime series(sayonefortherateofchangeofwages).Onlyadiscrete numberofregularly-spacedobservations areavailable, saythoseat1,2,and 3,and itisdesiredtoapproximatethederivativeat2(the truevalue beinggiven

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