New evidence on the wage curve: A spatial panel approach

Following Blanchflower and Oswald, a "wage curve" describes the wage level as a downward-sloping convex curve of the regional unemployment rate. This article makes two major contributions in the analysis of the wage curve. First, it is recognized that potential endogeneity of the regional unemployment rate should be subject to testing not only in combination with regional-specific effects but also in combination with time-specific effects. For this purpose, the authors develop a new estimator, the spatial first difference 2SLS estimator Second, it is recognized that wages may not only respond to the regional but also to the national unemployment rate. In the empirical analysis, the wage curve for East Germany is estimated using a comprehensive database that provides panel data classified into 114 administrative districts during the 1993 to 1999 period