Abstract:
This study aims to explain how nominal wages in the private and public sectors in Egypt behaved in response to changes in domestic prices during the period 1985–2009. A vector error correction model (VECM) is estimated to investigate the short-run dynamics among nominal wages, and the urban consumer price index (CPI), while accounting for the underlying macro determinants of price inflation, namely, the bilateral (LE/US dollar) nominal exchange rate, domestic credit and real gross domestic product (GDP). The empirical findings show that nominal wages in both the public and private sectors exhibit some “stickiness” in response to a price shock, leaving real wages to be eroded in the short-run. Nominal wage adjustments in the public sector seem to seek compensation for higher domestic prices, regardless of developments in economic activity. By contrast, the nominal wage in the private sector undergoes smaller adjustments in response to price shocks. As such, the nominal wage in the private sector is more reflective of economic activity, and thus its adjustments are in line with developments in real GDP. Finally, it is shown that although nominal wages contribute to CPI growth in the long run, shocks in the nominal exchange rate and in the CPI itself remain more important as sources of variation in consumer prices.
