The effect of unemployment, aggregate wages, and spatial contiguity on local wages: An investigation with German district level data

Abstract.

Despite spatial rigidity of collectively negotiated wages the local unemployment rate is found to have a significant negative impact on wages. This impact is shown to be consistent with both the wage-curve hypothesis and modern Phillips-curve modelling. Spatial contiguity effects are found in wages and unemployment and their neglect leads to an underestimation of the effect of local unemployment. Yet, the impact of local unemployment on wages turns out to be quite low as compared to studies for other countries. Some support for the hypothesis that negotiated wages suppress spatial wage flexibility comes from the finding that the impact of local unemployment on local wages decreases with its extent.