Consider the following wage-determination equation for the British economy* for the period 1950-1969:
Wˆ t = 8.582 + 0.364(PF)t + 0.004(PF)t-1 - 2.560Ut (1.129) (0.080) (0.072) (0.658)
R2 = 0.873 df = 15
where W = wages and salaries per employee PF = prices of ?nal output at factor cost
U = unemployment in Great Britain as a percentage of the total number of employees of Great Britain
t = time
(The ?gures in the parentheses are the estimated standard errors.)
a. Interpret the preceding equation.
b. Are the estimated coef?cients individually signi?cant?
c. What is the rationale for the introduction of (PF)t-1?
d. Should the variable (PF)t-1 be dropped from the model? Why?
e. How would you compute the elasticity of wages and salaries per em- ployee with respect to the unemployment rate U?