PHILIP E.T. LEWIS Bureau of Lubour Market Research Australia GERALD H. MAKEPEACE Labour Economics Unit University of Hull England The Estimation of a Disequilibrium Real Wage Equation for Britain* An aggregate wage equation is formulated based on a disequilibrium labor market model. The specification allows for an important special case to be tested, namely the equilibrium hypothesis that real wages move instantaneously to equate the de- mand for and supply of labor. The hypothesis that the British labor market has been in equilibrium is rejected. The adjustment path for real wages is monotonic and dominated by demand factors. Real wages move quickly to eliminate excess demand but the results contradict the monetarist contention that the aggregate la- bor market is continuously in a temporary, if not full, equilibrium. 1. Introduction This paper presents estimates of an aggregate wage equation for Great Britain that is based on a disequilibrium aggregate labor market model. The equilibrium hypothesis, that real wages move instantaneously to equate the demand for and supply of labor, is a special case of the model proposed. When the equilibrium hypoth- esis is tested against the more general disequilibrium hypothesis, the results favor a disequilibrium interpretation of the labor market. They show that real wages move to eliminate excess demand, but contradict the monetarist’s speculation that the aggregate labor mar- ket is continuously in a temporary, if not full, equilibrium. The paper is divided into three sections containing, in turn, details of the model specification, the empirical results, and the main conclusions to be drawn from the exercise. Of these, only the model specification requires further comment at this stage. A wage ad- justment equation is employed that relates the adjustment of real wages to the equilibrium real wage. The final estimating equation is derived by specifying the determinants of the equilibrium real wage. The model may be interpreted as a generalized PAMEQ model *The views expressed in this paper are those of the authors and not necessarily those of the BLMR nor the Australian Government. Journal of Macroeconomics, Fall 1984, Vol. 6, No. 4, pp. 399-410 Copyright 0 1985 by Wayne State University Press. 399