Explaining Variations in Wage Curves: Theory and Evidence

This paper presents both theoretical analysis and econometric evidence for the United States, Great Britain and Norway on the extent to which hourly wages of different groups of workers are sensitive to local labour market conditions. We focus on differences by union status. Our theoretical framework captures both a turnover-based efficiency wage mechanism and one originating in union-firm bargaining. Under fairly general conditions, we show that wages are less sensitive to local unemployment the higher is the bargaining power of the union. In accordance with this theoretical prediction, we find that the absolute value of the elasticity of wages with respect to unemployment is higher in the nonunion sector than in the union sector for all three countries. We interpret the evidence as giving support to an efficiency wage interpretation of the wage curve.