An Introduction to the Wage Curve

Abstract

Economists and policymakers are interested in understanding the forces that determine the level of unemployment and the level of wages. This paper describes an empirical discovery-made with the help of international microeconometric evidence covering more than a dozen nations-about a link between these two variables. The connection can be portrayed on a graph with the level of unemployment on the horizontal axis and the level of wages on the vertical axis. Then the "wage curve," as shown in Figure 1, is a downwardsloping locus. This relationship tells us that (holding others things constant) if a region has a rise in unemployment in a particular year, those who live there will have a fall in their wages in that year.What does this curve mean? How, in a field where fully controlled experiments are almost impossible, could there be any convincing scientific basis for this wage curve? What is the relationship between the wage curve and a Phillips curve, other than that the curve of Figure 1 looks like a Phillips curve with the vertical axis mislabeled? How does the wage curve fit into existing economic knowledge, and is the empirical finding consistent with competitive theory?

The costs of climate policies in a second-best world with labour market imperfections

“…We acknowledge that wage curves are only one of several alternative representations of labour market rigidities. Moreover, the value of the wage curve elasticity valid for each country is still debated: the value of 20.1 found by Blanchflower and Oswald (1995) for 12 countries has been confirmed by many studies (e.g. Blanchflower and Oswald (2005) give an impressive list of such studies).…”

“…The wage curve specification allows the theories to be consistent with both involuntary unemployment and the fact that real wages fluctuate less than the paradigm of the conventional flexible labour supply curve predicts. Microeconometric evidence for such formulation was given in a seminal contribution by Blanchflower and Oswald (1995).…”

“…This study was originally motivated by the need to identify the sources of these costs and to understand which policies could smooth the transition while achieving the same environmental results, and led us to understand the critical role of the labour market. Technically, in each region of the model, the labour market is modelled through an aggregate regional wage curve that links real wages to the unemployment rate (Blanchflower and Oswald, 1995).…”

Monetary compensations in climate policy through the lens of a general equilibrium assessment: The case of oil-exporting countries

“…18 Note that this effect is measured under the assumption that Middle-East governments maintain the current levels of energy subsidies but do not seek to increase it to offset the increase of fuel prices due to the climate policy because it would involve a non-affordable amount for public spending 19 Microeconometric evidence for such formulation was given in a seminal contribution by (Blanchflower and Oswald 1995) and extensive theories have been developed to support such representation of the labour market (see (Layard et al, 2005) for an overview). The basic idea is that high unemployment represents an outside threat that leads workers to accept lower wages as from either the bargaining approach (Layard and Nickell, 1986) or the wage-efficiency approach (Shapiro and Stiglitz, 1984).…”

Dimensions of the wage-unemployment relationship in the nordic countries: Wage flexibility without wage curves

“…xviii It is likely that xx Actually, it seems as though deleting regional dummies has only been applied for two other countries in order to produce the preferred estimates in Blanchflower and Oswald (1995). In the case of Austria, the main effect of dropping 5 out of 8 regional dummies is an increase in the precision of the point estimate; there is only a minor change in the wage-unemployment elasticity from -0.08 to -0.09, see Blanchflower and Oswald (1994), p. 316.…”