Abstract

This dissertation seeks to apply the framework of Kumar, Webber, and Perry (2012), who studied the interconnection between the inflation rate, real wages, and labor productivity in Australia to the Canadian context. To attain the primary objective of this research, the study utilized monthly data from January 2000 to 2023, sourced from CANSIM, Statistics Canada. The unit root test showed that all variables were stationary at the first level differential, paving the way for applying the Vector Error Correction Model and Granger causality, which estimate the long and short-run effects. The main finding shows that the inflation rate and real wages positively drive labor productivity; thus, a 1% surge in real wage propels labor productivity to increase by 0.406%, while a 1% rise in inflation rate increases labor productivity by 0.115% in the long run, holding all other factors constant. In the short run, my results indicate a two-way directional Granger causality between the inflation rate and real wage, suggesting that past values of inflation influence current real wages and, reciprocally, past values of real wages impact current inflation. Although this study partially agrees with Kumar et al.’s (2012) findings, the partial differences in both studies could be attributed to the heterogeneous nature of individual economies.