Wage flexibility in regional labour markets: evidence from Italy and Germany

Abstract

This paper investigates the functioning of regional labour markets in Italy and Germany for different employee groups and regions. We derive theoretical hypotheses on group specific correlations between regional unemployment and individual wages distinguishing between depressed and booming areas. Using micro data properly matched to local unemployment rates, we specify and empirically test different wage equations. For Italy we find no evidence in favour of a relationship between wages and local unemployment (wage curve). In Germany results appear to be sensitive to model specification and the type of employees considered. In both countries, the reaction of wages to local unemployment varies significantly along the wage distribution, being more sensitive around median quantiles.