Spatial Heterogeneity and the Wage Curve Revisited

Most "wage curve" studies ignore the geography of local labor markets. However, when a local labor market is in close proximity of other labor markets, a local shock that increases unemployment may not lead to lower pay rates if employers fear outward migration of their workers. Hence, the unemployment elasticity of pay will be greater, the more isolated the local labor market is. Wages are also expected to be higher in regions that interact strongly with other regions. These hypotheses are confirmed by means of an estimation of wage curves with data for 327 regions of western Germany over the period 1990-1997