Local unemployment and wages

The purpose of this paper is to examine how the state of the local labour market influences pay, by estimating a Wage Curve for France. First it appears that individual wages are negatively correlated with regional unemployment rates, when taking into account individual characteristics. This feature is true for all categories of workers, for different measures of the local unemployment rate, and also for aggregate data. We find an elasticity of wages with respect to unemployment varying between 0.05 and 0.1, and show that permanent effects of the local unemployment on wages rate are stronger than transitory effects. Second we run estimations on cross section and find that the response of wages to unemployment has decreased over time. We try more flexible functional forms for the unemployment rate and it appears that the negative relationship between wages and unemployment is convex rather than linear. Finally, we do not find much autoregression in our wage equation (like Blanchflower and Oswald, 1994). It would mean that the levels and not the variations of wages are related to unemployment, contrary to a Phillips Curve specification.