Real Wages and the Lucas Critique: Can the Government Tax Policy Influence Wage Growth in Brazil?

Abstract

The paper uses cointegration analysis to investigate the long run behaviour and short term dynamics of aggregate real wages in Brazil over the period 1986 to 1993. First, we show that real wages, inflation, productivity, unemployment and the tax wedge are cointegrated. Second, the dynamics of this relationship are specified to obtain a satisfactory representation of the real wages, which is structurally stable over the period despite major policy changes. Thirdly, evidence is presented for the super-exogeneity of the tax wedge, an important result which shows that the path or real wages can be influenced by government policy without inducing Lucas-critique problems.