Regional Wage Responses to Unemployment and Profitability: Empirical Evidence from Norwegian Manufacturing Industries

This paper studies regional wage determination using panel data from a large sample of Norwegian municipalities covering the time period 1970-1988. The main conclusion is that regional manufacturing wages are significantly affected by regional manufacturing profitability as well as regional unemployment. The estimated regional insider weight is slightly above 0.1 and very stable irrespective of specification. The size of the regional unemployment coefficient is rather small, while aggregate unemployment is more important. However, the total long run unemployment elasticity is -0.1, implying that the mechanisms behind this empirical regularity may differ across countries. Our study provide evidence in favour of a hypothesis that unemployment mainly affects Norwegian wages through central wage settlements, while the effect working through firm level wage setting is more limited.