Local and Spatial Cointegration in the Wage Curve – a Spatial Panel Analysis for German Regions

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Reinhold Kosfeld, Christian Dreger

In: Review of Regional Research 38 (2018), 1, S. 53-75


The wage curve introduced by Blanchflower and Oswald (1990, 1994b) postulates a negative correlation between wages and unemployment. Empirical studies use different channels for a theoretical underpinning the relationship. Panel data models mostly draw on bargaining power or the efficiency wage hypothesis. Spatial econometric approaches can be rationalized by monopsonistic competition. However, the approaches either ignore the issue of nonstationarity or treat the data as if it were nonspatial. In this paper, we adopt a global cointegration approach to account for nonstationarity of regional data. By specifying a spatial error correction model (SpECM), equilibrium adjustments are considered in both time and space. For West Germany, strong evidence for the existence of a long-run wage curve with spatial effects is found.

JEL-Classification: J30;J60;C33;R15
Keywords: Wage curve,Regional labour markets, Spatial panel models, Global cointegration analysis, Spatial error correction model