Are real wages and unemployment related?

In this paper we propose an alternative method for investigating the sources behind the behaviour of real wages and unemployment. The model we study is a certain cointegrated VAR, a so-called common trends model, which has become increasingly popular in the empirical growth/business cycle literature. This model leads us to emphasize the distinction between long-run and short-run relations. Using quarterly Swedish data (1965-90), we find only weak evidence of a short-run relation between real wages and unemployment as reported in traditional single-equation error correction models. There is even less evidence of a long-run relation.