Regional Wage Responsiveness to Unemployment — Rural–Urban Heterogeneity and Policy Implications

Abstract

AbstractPrevious studies of regional wage formation in Norway have indicated low regional wage responses to regional unemployment. However, previous analyses have not investigated whether wages are more rigid in rural areas than in urban areas, which in the case of Norway is important for the efficiency of regional differentiated payroll taxes. In the paper, the authors focus on the rural–urban nature of the wage curve in Norway. We re‐estimate the wage curve on the basis of a large Norwegian microlevel dataset covering the entire Norwegian labour market during the years 2008–13. Our findings are rural–urban heterogeneity in the wage curve, with higher unemployment elasticity of pay in the urban region than in the rural regions. The elasticity of the average rural wage curve is about 70 per cent that of the of the urban wage curve. The authors conclude that to achieve the goals of regional policy in Norway, more rigid wages in rural areas seem to be an argument for continuing to have an active labour market policy for rural regions.