Spatial aggregation bias in wage curve and NAWRU estimation
I argue in this paper that the estimation of wage curves and NAWRUs at the country level suffers from spatial aggregation bias. Using European data for the years 2000 to 2017, wage curves estimated at the country level are consistently found to be steeper, and NAWRUs higher, compared to estimation using the same data at the underlying regional level. The distribution of regional unemployment rates within countries over time is not mean-scaled. Regions with low unemployment rates are the main drivers of changes in aggregate unemployment. The relationship between wages and unemployment is nonlinear and the steepness of the wage curve in regions with low unemployment tends to dominate at the aggregate (country) level, which leads to overestimating wage pressure in the economy.
PERSYN Damiaan;
2020-04-15
European Commission
JRC120448
https://publications.jrc.ec.europa.eu/repository/handle/JRC120448,
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