Spatial contiguity and the wage curve revisited (479)

Theme Track: Labour Markets - Wages

Authors:
Longhi, Simonetta ; Nijkamp, Peter ; Poot, Jacques

During the last decade there has been extensive research on the relationship between wages and unemployment in local labour markets. Specifically, many studies across the world have found an inverse relationship, which is commonly referred to as the wage curve. A weakness of this research is that most studies treat the local labour markets as independent "islands" in the national economy. However, Buettner (1999) has detected spatial contiguity effects in the case of West Germany. Neglect of these effects led to an underestimation of the elasticity of the wage curve.

In this paper, we update and extend the analysis of Buettner. We consider the wage curve as indicative of local monopsonistic competition. If a region is relatively close to other labour markets, a local shock that increases unemployment may not lead to lower pay rates if employers fear outward migration to neighbouring regions. Hence, the unemployment elasticity of pay will be greater, the more isolated the local labour market is. This effect will be tested by means of data for 327 West German districts over the period 1987-97.

Buettner, T. (1999) "The effect of unemployment, aggregate wages, and spatial contiguity on local wages: An investigation with German district level data", Papers in Regional Science, 78(1): 47-68.

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