Wage equations, wage curves and all that

Abstract

This paper is concerned with the relationship between wages and unemployment. Using UK regions and individuals as the basis for our analysis, the following questions are investigated. First, is the wage equation a relationship between unemployment and wages or wage changes? Second, can we identify the relationship completely by looking at regional wages and regional unemployment or do regional wages depend on aggregate unemployment as well? Third, are wages influenced only by the current state of the labour market or do contracts lead to wages depending on labour market conditions in the last boom or upon entry into the job? Finally is the wage-unemployment relationship influenced by inflation, competition or the housing market?

New evidence on the dynamic wage curve for Western Germany: 1980–2004

“…It contains information on about 974,179 employees. This data set compares well with the one used by Bell, Nickell & Quintini (2002) for the U.K. Their data source was the U.K.…”

“…The other columns in Table 1 show the results based on the `first stage panel' wage equation by type of worker, i.e., male, female, young, old, low or high level of education and foreigners or Germans. We report the fixed effects estimator assuming the unemployment rate is exogenous, as well as the fixed effects estimator instrumenting for the unemployment rate by its lagged values, see Bell, et al (2002).…”

“…Following Bell, et al (2002), we analyse the wage curve in two steps. A `first stage panel´ wage equation is estimated for each region j as follows: …”

“…Bell, et al (2002) estimate their dynamic models with fixed effects, which is subject to the Nickell (1981) bias of order (1/T). In our case, T=25, therefore the potential bias may be small.…”

“…Contrary evidence can be found in Blanchard and Katz (1997) for the U.S. and Bell, et al (2002) for the U.K. More recently, Blanchflower and Oswald (2005, p.5) admit that, in hindsight, their 1994 book "…failed to examine sufficiently carefully the autoregressive nature of hourly pay in the United States". They find more autoregression in pay in the U.S. than in many nations and they emphasize wage dynamics arguing that it can be expected to play a central role.…”