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Review of Regional Research

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05-04-2017 | Original Paper

Local and spatial cointegration in the wage curve – a spatial panel analysis for german regions

Authors: Reinhold Kosfeld, Christian Dreger

Published in: Review of Regional Research | Issue 1/2018

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Abstract

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.

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SLX stands for spatial lag of independent variables (X variables). For a taxonomy of spatial panel data models s. Elhorst (2014, pp. 37 with reference to p. 9).

The IPS test is a test on the presence of a unit root in heterogenous panels without accounting for cross-sectional dependence (Im et al. 2003).

In case of a negative spatial adjustment coefficient κ*, above-equilibrium wages in the neighbouring regions would exert a downward pressure on local wages. In the scarce literature on the SpECM approach there is no consensus on the sign of the spatial error correction coefficient. While Beenstock and Felsenstein (2010) found the same sign for both adjustment coefficients in regional house price modelling, the findings of Mitze and Özyurt (2014) for trade- and FDI-driven productivity growth are completely in line with our reasoning.

In panel data analysis, usually the Gauß test (z-test) is applied for assessing significance. This ignores the fact that estimated coefficients follow nonstandard distributions in the case of nonstationarity unless the explanatory variables of the cointegrating relation are strictly exogenous. Traditional significance tests on the regression coefficients in panel models used in established toolboxes and programs like Matlab, R, Stata and EViews should be interpreted with caution.

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Title: Local and spatial cointegration in the wage curve – a spatial panel analysis for german regions
Authors: Reinhold Kosfeld
Christian Dreger
Publication date: 05-04-2017
Publisher: Springer Berlin Heidelberg
Published in: Review of Regional Research / Issue 1/2018
Print ISSN: 0173-7600
Electronic ISSN: 1613-9836
DOI: https://doi.org/10.1007/s10037-017-0113-z