1. Flash estimates of the LCI using General to Specific Modelling (GETS)
Graeme Chamberlin
Office for National Statistics

2. PCGets (Hendry and Krolzig-2001)
Automatic general to specific modelling
Reduces high search costs of GETS
Multiple path searches & encompassing tests
Start with a General Unrestricted Model (GUM)
Degrees of freedom
Colinearity
Judgments are required concerning
Indicator selection
Data transformation

3. EZ-15: wage and non-wage components of the LCI

4. EU-28: wage and non-wage components of the LCI

5. Economic determinants of LCI
Wage bargaining models
- Prices (expectations)
- Unemployment/employment
- Capacity utilisation
- Productivity
- Competition
- Wage dynamics

6. Possible Indicators: Hard data
Prices data
GDP deflator
Consumption deflator
Import price deflator
HICP
Output and employment data
GVA/Employment (productivity)
Unemployment
Wages data
Compensation of employees (NA)
Wages and salaries (NA)
Earnings- manufacturing/industry (OECD MEI)
Earnings- private sector (OECD MEI)
Earnings- all activities (OECD MEI)

7. Possible indicators: Soft data
Industry
Employment expectations- months ahead
Production expectations- months ahead
Selling prices expectations- months ahead
Productive capacity
Capacity utilisation
Domestic competition
EU competition
External (outside EU) competition
Labour shortage limiting production
Construction
Price expectations- months ahead

8. Possible indicators: Soft data
Retail
Employment- recent months
Consumer
Price trends- last 12 months
Price trends- next 12 months
Unemployment expectations- next 12 months
Services
Employment- next months

9. EZ-15: Full sample (1997q2-2008q2) Model Indicators MSE Baseline
Constant
Labour Cost Index (-1)
0.0143
Hard
GDP deflator (-2)
0.0139
Soft
Labour Cost Index (-3)
Industry Productive Capacity
Construction Employment- next months (-1)
Services Employment- next months (-1)
0.0069

10. EU-28: Full sample (1997q2-2008q2) Model Indicators MSE Baseline
Labour Cost Index (-2), (-3), (-4)
Dummy 1998q1
0.0262
Hard
Labour Cost Index (-2)
Manufacturing earnings- EU (-3)
0.0231
Soft
Constant
Labour Cost Index (-1), (-3), (-4)
Industry competition domestic
Industry prices- next months (-1)
Industry labour shortage
0.0089

11. EZ-15: One step ahead forecasts (2003q2-2008q2)

12. EU-28: One step ahead forecasts (2003q2-2008q2)

13. Mean squared forecast errors (2003q2-2008q2)
Model
Baseline
Hard data
Soft data
EZ-15
0.0127
0.0199
0.0117
EU-27
0.0332
0.0269

14. Summary remarks
Hard data indicators do not unequivocally improve flash estimates over the baseline models.
Soft data indicators do appear useful for the EU-28 flash estimates but not the EZ-15.
But.. The use of soft data is not universally accepted and models based on it tend to be less stable.
Simple models… ARDL or ARIMA seem to the most appropriate for flash estimates of the LCI.