Impact of Oil Price Changes on Wage Formation in Norway between 1970 and 2016. A time series analysis of macroeconomic effects.

Abstract

In this paper, I would like to shed light on the issue as to how the impact of fall in oil demand does affect the Norwegian wage formation in years 1970 to 2016, using a dataset to determine long-term relationships between chosen variables. The original assumption was that there is a long-term equilibrium. The uncertainty was connected to the question whether that equilibrium predicates wage changes. The results show that indeed, oil price is an important driver of wage levels in a small open, oil-exporting economy, such as the Norwegian one. Long-run relationship between the movements in oil prices and wage levels have been detected through a cointegration method, using the error correction model estimation. Lon-run equilibria are detected, and determine that the negative oil demand shock affects the wage levels negatively through indirect and direct channels. The validity of this statement is confirmed by numerous ECM models, while allowing for interconnection between other macroeconomic variables. The increase in oil prices influence wage formation. A fall in the commodity price would not have the same impact on wage levels in Norway.