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Estimating the Wage Curve with Spatial Effects and Spline Functions

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Author Info

  • Martin Falk

    ()
    (Austrian Institute of Economic Research (WIFO))

  • Thomas Leoni

    ()
    (Austrian Institute of Economic Research (WIFO))

Abstract

In this paper, we provide new empirical evidence on the relationship between regional wages and unemployment using spatial econometric techniques and allowing for nonlinearities in the model. The estimates are based on Austrian administrative data for the year 2001. The wage elasticity with respect to the unemployment rate is about -0.03 and thus quite low in international comparison. This can be explained by institutional characteristics of the Austrian wage bargaining system. Allowing for a more flexible functional form by estimating a model with linear spline functions, we find that the wage curve is only present in areas with a medium level of unemployment. The often used quadratic specification is therefore inadequate in describing the shape of the earnings unemployment relationship. Finally, we show how OLS tends to overestimate the wage-curve elasticity in absolute terms.

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File URL: http://www.accessecon.com/Pubs/EB/2011/Volume31/EB-11-V31-I1-P57.pdf
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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 31 (2011)
Issue (Month): 1 ()
Pages: 591-604

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Handle: RePEc:ebl:ecbull:eb-09-00585

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Keywords: wage curve; unemployment; spatial dependence; spline functions;

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  1. Sanz-de-Galdeano, Anna & Turunen, Jarkko, 2006. "The euro area wage curve," Economics Letters, Elsevier, vol. 92(1), pages 93-98, July.
  2. de la Fuente, Angel & Doménech, Rafael, 2002. "Educational Attainment in the OECD, 1960-95," CEPR Discussion Papers 3390, C.E.P.R. Discussion Papers.
  3. Andreas Ammermuller & Claudio Lucifora & Federica Origo & Thomas Zwick, 2010. "Wage Flexibility in Regional Labour Markets: Evidence from Italy and Germany," Regional Studies, Taylor & Francis Journals, vol. 44(4), pages 401-421.
  4. Winter-Ebmer, Rudolf, 1996. "Wage curve, unemployment duration and compensating differentials," Labour Economics, Elsevier, vol. 3(4), pages 425-434, December.
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Cited by:
  1. Roberto Bande Ramudo & Melchor Fernández Fernández & Víctor Montuenga Gómez, 2011. "Wage flexibility and local labour markets: homogeneity of the wage curve in Spain," Documentos de trabajo - Analise Economica 0044, IDEGA - Instituto Universitario de Estudios e Desenvolvemento de Galicia.

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