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Margin: The Journal of Applied Economic Research
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Articles

A Dynamic Equilibrium between Inflation and Minimum Wages in Sri Lanka

S.P. Jayasooriya

The author is a Research Fellow at the Department of Agricultural Economics and Business Management, Faculty of Agriculture, University of Peradeniya, Sri Lanka; e-mail: jayasooriyasp{at}yahoo.com

This paper explores the dynamic equilibrium between minimum wages and inflation in Sri Lanka. From a theoretical perspective, while minimum wages tend to be sluggish in the economy, changes in price levels are compulsive. This empirical investigation which includes causality, co-integration and error correction models, reveals the existence of a long-term equilibrium relationship between minimum wages and inflation, and a one-way causality between the two variables. An interruption in equilibrium leads not only to a significant adjustment process but also to structural changes in long-run equilibrium. Finally, macroeconomic stability is established through the impulse response function in a situation, where shocks are applied to both minimum wages and inflation. The study recommends policy-making entities contemplate a minimum wage adjustment process in a climate of unstable inflation.

Key Words: Dynamic Equilibrium • Inflation • Minimum Wage • Structural Change • Impulse Response • Sri Lanka • JEL Classification: B22 • JEL Classification: C01 • JEL Classification: C32 • JEL Classification: O11

Margin: The Journal of Applied Economic Research, Vol. 3, No. 2, 113-132 (2009)
DOI: 10.1177/097380100900300202
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