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Microfoundations of the Wage Inflation in the Czech Republic

  • Kamil Galuscak
  • Daniel Munich

We investigate whether microfoundations might increase the predictive power of macroeconomic models of wage inflation. By comparing past predictions to observed values, we find that the Phillips curve with the average unemployment rate in districts with prevalently low unemployment rates delivers more accurate predictions of aggregated wage inflation than the Phillips curve with the overall unemployment rate. The identification of specific groups of districts is based on our estimates of the wage curve at the regional level, i.e. the relationship between the regional level of wages and regional unemployment. Real wages adjust to changes in local unemployment in districts with low unemployment rates, a low share of public sector employment, and for the short-term unemployed. On the other hand, the welfare system might represent a floor preventing downward wage adjustments in districts with high unemployment rates and for the long-term unemployed. In the public sector, wages are negotiated at the economy-wide level, while the variance in regional unemployment does not play a role.

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Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2003/01.

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Date of creation: Jan 2003
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Handle: RePEc:cnb:wpaper:2003/01
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  1. David G. Blanchflower & Andrew J. Oswald, 1995. "The Wage Curve," MIT Press Books, The MIT Press, edition 1, volume 1, number 026202375x, June.
  2. David Card, 1995. "The Wage Curve: A Review," Working Papers 722, Princeton University, Department of Economics, Industrial Relations Section..
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  4. Olivier Blanchard & Lawrence F. Katz, 1996. "What We Know and Do Not Know About the Natural Rate of Unemployment," NBER Working Papers 5822, National Bureau of Economic Research, Inc.
  5. Olivier Jean Blanchard & Lawrence Katz, 1999. "Wage Dynamics: Reconciling Theory and Evidence," NBER Working Papers 6924, National Bureau of Economic Research, Inc.
  6. Huitfeldt, H., 2001. "Unemployment, Labour Market Programmes and Wage Determination: Evidence from the Czech and Slovak Republics," Papers 2001:01, Uppsala - Working Paper Series.
  7. Acemoglu, D., 1996. "Changes in Unemployment and Wage Inequality: An Alternative Theory and Some Evidence," Working papers 96-15, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Blanchflower, David G., 2001. "Unemployment, Well-Being, and Wage Curves in Eastern and Central Europe," Journal of the Japanese and International Economies, Elsevier, vol. 15(4), pages 364-402, December.
  9. Huitfeldt, Henrik, 2001. "Unemployment, Labour Market Programmes and Wage Determination: Evidence from the Czech and Slovak Republics," Working Paper Series 2001:1, Uppsala University, Department of Economics.
  10. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  11. McCormick, Barry, 1997. "Regional unemployment and labour mobility in the UK," European Economic Review, Elsevier, vol. 41(3-5), pages 581-589, April.
  12. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
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