Long-Term Capital Goods Importation and Minimum Wage Relationship in Turkey: Bounds Testing Approach

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Abstract

In order to examine the long-term relationship between capital goods importation and minimum wage, autoregressive distributed lag (ARDL) bounds testing approach to the cointegration is used in the study. According to bounds test results, a cointegration relation exists between the capital goods importation and the minimum wage. Therefore an ARDL(4,0) model is estimated in order to determine the long and short term relations between variables. According to the empirical analysis, there is a positive and significant relationship between the capital goods importation and the minimum wage in Turkey in the long term. A 1% increase in the minimum wage leads to a 0.8% increase in the capital goods importation in the long term. The result is similar for short term coefficients. The relationship observed in the long term is preserved in short term, though in a lower level. In terms of error correction model, it can be concluded that error correction mechanism works as the error correction term is negative and significant. Short term deviations might be resolved with the error correction mechanism in the long term. Accordingly, approximately 75% of any deviation from equilibrium which might arise in the previous six month period will be resolved in the current six month period. This means that returning to long term equilibrium progresses rapidly.

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