Abstract
In 1994, Blanchflower and Oswald reported that they have found an law of economics - the Wage Curve. According to their empirical results, the elasticity of wages with respect to regional unemployment is -0.1. This holds especially for the Anglo-Saxon countries. Our paper reconsiders the western German Wage Curve using disaggregated regional data and is based on a random sample of 974,179 employees drawn from the employment statistics of the Federal Employment Services of Germany (Bundesagentur fur Arbeit) over the period 1980-2004. We find that the wage equation is highly autoregressive but far from unit root. This means that this wage equation is not a pure Phillips curve, nor a static Wage Curve, and one should account for wage dynamics. The unemployment elasticity is significant but relatively small: only between -0.02 and -0.04. We also check the sensitivity of this wage elasticity for different population groups (young versus old, men versus women, less educated versus highly educated, German native versus foreigner). We confirm that the wage elasticity is more flexible the weaker the bargaining power of the particular group.
Highlights
Blanchflower and Oswald (1994) reported that they have found an ‘empirical law of economics’ – the Wage Curve
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. It is in this spirit that we re-examine the static formulation of the West German Wage Curve considered by Baltagi and Blien (1998). We find that this wage equation is dynamic and we estimate it for different population groups
We report German Wage Curve results based on a random sample from the IAB Employment Sample
Summary
Blanchflower and Oswald (1994) reported that they have found an ‘empirical law of economics’ – the Wage Curve, (see Blanchflower and Oswald 2005). Our data base is a panel data set obtained from the employment sample of the German Institute for Employment Research (IAB) which distinguishes 326 regional labour markets over the period 1980-2004 It is based on a 2-% random sample of the total population of employees covered by the social insurance system in western Germany. 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. We confirm that the wage elasticity is more flexible the weaker the bargaining power of the particular group
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