A Cointegration Model for Search Equilibrium Wage Formation

This discussion paper resulted in a publication in the <I>Journal of Applied Economics</I>, 9, 235-54.<P> In flow models of the labor market, wages are determined by negotiations between workers and employers on the surplus value of a realized match. From this perspective our study presents an econometric analysis of the influence of labor market flows on wage formation as alternative to the traditional specification of wage equations where unemployment represents the Phillips-curve or wage curve-effects. We estimate a dynamic wage equation for the Netherlands using a cointegration approach. We find that labor flows, and notably flows from outside the labor market, are important determinants for both short run and long run wage setting