A note on the relationship between real wages and employment

Purpose – Tests for the existence of a long‐run relationship between real wages and employment, utilising annual data from 1961‐1996 for a panel of 12 European Union countries. Design/methodology/approach – Applies modern time series techniques organised around panel unit root and panel cointegration tests to draw sharper conclusions from the short time series that are typically available. Findings – Indicates that a long‐run relationship between real wages and employment cannot be established. This being so, little success is expected in bringing down unemployment, the most pressing problem in the European Union, by reducing real wages. Originality/value – Investigates the long‐run relationship between real wages and employment by conducting more reliable tests in the context of 12 European countries, namely Belgium, Denmark, Germany, Spain, France, Ireland, Italy, The Netherlands, Portugal, the UK, Norway and Finland over the period 1961‐1996.