Regional Wage Responsiveness to Unemployment — Rural–Urban Heterogeneity and Policy Implications

Abstract

Previous studies of regional wage formation in Norway have indicated low regional wage responses to regional unemployment. However, previous analyses have not investigated whether wages are more rigid in rural areas than in urban areas, which in the case of Norway is important for the efficiency of regional differentiated payroll taxes. In the paper, the authors focus on the rural–urban nature of the wage curve in Norway. We re‐estimate the wage curve on the basis of a large Norwegian microlevel dataset covering the entire Norwegian labour market during the years 2008–13. Our findings are rural–urban heterogeneity in the wage curve, with higher unemployment elasticity of pay in the urban region than in the rural regions. The elasticity of the average rural wage curve is about 70 per cent that of the of the urban wage curve. The authors conclude that to achieve the goals of regional policy in Norway, more rigid wages in rural areas seem to be an argument for continuing to have an active labour market policy for rural regions.

The wage curve after the Great Recession

“…Baltaji and Başkaya (2022) provide support for a wage curve for formal and informal workers in Turkey, while Faryna et al (2022) estimate a wage curve for Ukraine. Wage curves have also been found for Norway (Iacono and Ranaldi 2020;Johansen et al 2019), Russia (Shilov and Möller 2009), Greece (Cholezas and Kanellopoulos 2015), Korea (Park and Shin 2007), Japan (Inagaki 2015), Germany (Kosfeld and Dreger 2018) and the USA (Holmes and Otero 2022). Blanchflower and Oswald (1995) are at pains to point to the differences between a Phillips curve and a wage curve.…”

“…Wage curves have also been found for Norway (Iacono and Ranaldi 2020; Johansen et al . 2019), Russia (Shilov and Möller 2009), Greece (Cholezas and Kanellopoulos 2015), Korea (Park and Shin 2007), Japan (Inagaki 2015), Germany (Kosfeld and Dreger 2018) and the USA (Holmes and Otero 2022).…”

Regional features of rural unemployment in Russia

“…Bearing this model in mind, Hicks et al (2017) showed that there are significant productivity gaps between the agricultural and non-agricultural sectors and examined the implications for sectoral labor redistribution. Ulf et al (2019) drew conclusions related to the heterogeneity of the wage curve between urban and rural areas, as well as the higher elasticity of unemployment wages in urban areas than in rural areas.…”

Regional Aspects of a Climate and Energy Tax Reform in Norway—Exploring Double and Multiple Dividends

“…In Norway, wage-formation processes are highly coordinated such that centralized wage bargaining theory [31] becomes relevant. Based on the work by Blanchflower and Oswald [32], we derived wage-curve elasticities for our three labor types [33] and found that a 1% increase of the regional unemployment rate will reduce low-educated workers' wages by 7% and medium-and highly-educated workers' wages by about 4%. For the case of rigid wages, we can, hence, express the relation between wages W r and unemployment rate U r for, respectively, Low (L)-, Medium (M)-and Highly (H)-educated workers in region r, as in Equation (1).…”

“…For the case of rigid wages, we can, hence, express the relation between wages W r and unemployment rate U r for, respectively, Low (L)-, Medium (M)-and Highly (H)-educated workers in region r, as in Equation (1). These parameter estimates are collected from empirical work presented in Johansen [34] and Johansen et al [33]. To ascertain whether a CETR can lead to double or even multiple dividends, we assess first the situation before the tax is introduced.…”