Working Paper: CEPR ID: DP1020
Authors: Michael Burda; Antje Mertens
Abstract: The need for locational competition among labour markets arises when labour is immobile. At the same time market clearing under such conditions can lead to wage and income variability. In such cases demand for insurance against regional shocks arises, which can be provided by nationwide collective bargaining and other national institutions in the spirit of the implicit contract literature. In this interpretation, the desirability of locational competition depends on the nature of shocks which affect the regions. Real wage and other types of flexibility will be invoked by localities only in response to systematic shocks. We present evidence that West German and other European experiences are more consistent with an insurance contract interpretation, while US regional labour markets are characterized by high regional mobility, rendering insurance less relevant.
Keywords: wage differentials; implicit contracts; trade unions; mobility
JEL Codes: J31; J41; J50; J61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| labor immobility (J69) | wage variability (J31) |
| market clearing (D41) | wage variability (J31) |
| wage insurance contracts (J38) | reduced wage variability (J31) |
| regional wage rigidity (J39) | optimal union policy (J58) |
| increased unemployment (J65) | reduced wage variability (J31) |
| increased variance of regional shocks (R11) | greater unemployment variability (J69) |
| systematic shocks (E32) | increased wage flexibility (J39) |
| high labor mobility (J61) | wage insurance unnecessary (J65) |