Consider the following wage-determination equation for the British economy* for the period 1950€“1969:

where

W = wages and salaries per employee
PF = prices of final output at factor cost
U = unemployment in Great Britain as a percentage of the total number of employees in Great Britain

t = time
a. Interpret the preceding equation.
b. Are the estimated coefficients individually significant?
c. What is the rationale for the introduction of (PF)tˆ’1?
d. Should the variable (PF)tˆ’1 be dropped from the model? Why?
e. How would you compute the elasticity of wages and salaries per employee with respect to the unemployment rate U?

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W, = 8.582 + 0.364(PF); + 0.004(PF);–1 – 2.560U, (0.658) df = 15 (0.072) (1.129) (0.080) R² = 0.873