Wage curve

The wage curve is the negative relationship between the levels of unemployment and wages that arises when these variables are expressed in local terms. According to David Blanchflower and Andrew Oswald (1994, p. 5), the wage curve summarizes the fact that "A worker who is employed in an area of high unemployment earns less than an identical individual who works in a region with low joblessness."

Explanation

One way to understand the wage curve is as follows. The labour supply of each individual is positively correlated to wages, therefore the higher is the hourly wage offered, the more hours an individual is willing to work. However, there is a limit to which every person would be willing to sacrifice an hour of leisure or rest, for an hour's worth of wages. Let's say that X is the maximum number of hours a person can work, and $A is the minimum hourly wage rate he expects in return. Any wage $B, greater than $A, will increase the worker's daily wage without increasing the hours of work. So if you need more hours of work than X, you need to hire more people.

Say you need to purchase Y hours of labour from the labour market. Let us assume that Y = 4X. This means that Y is four times as much as one labourer's maximum labour offer. If you pay $A an hour then you can hire 4 labourers to work for X hours each. However, depending on the labour market conditions, other options are open:

Say that there are not very many jobs in the labour market, unemployment is high and a lot of people are under-employed (working much fewer than X hours). In this situation the going rate is likely to be lower than $A as it is very unlikely that an employee would be asked to work for X hours. You would save money by hiring more than 4 labourers with each of them working fewer than X hours.

Say the labour market is tight and most people are already working X hours a day. It is very hard to find people who are not already earning $A an hour, and because of that you must match the money offer elsewhere in order to get someone to work for you. The wage level in this scenario would be higher than the earlier scenario.

In short, the lower unemployment is and the fewer laborers there are available, the higher the wages. The contrary is true when unemployment is high. This is the essence of the wage curve.

See also

• Phillips curve

Further reading

• Albæk, Karsten; Asplund, Rita; Barth, Erling; Blomskog, Stig; Guômundsson, Björn Rúnar; Karlsson, Vifill; Madsen, Erik Strøjer (2000). "Dimensions of the wage-unemployment relationship in the Nordic countries: Wage flexibility without wage curves". Research in labor economics. Vol. 19. Bingley: Emerald (MCB UP ). doi:10.1016/s0147-9121(00)19014-4. ISBN 978-0-7623-0693-0. (Preprint)
• Barth, Erling; Bratsberg, Bernt; Naylor, Robin A.; Raaum, Oddbjørn (2002). "Explaining variations in wage curves: Theory and evidence" (PDF). Memorandum. University of Oslo Department of Economics. hdl:10419/63146. ISSN 0801-1117. ResearchGate:5097167.
• Blanchflower, David G.; Oswald, Andrew J. (1990). "The wage curve" (PDF). The Scandinavian Journal of Economics. 92 (2): 215–235. doi:10.2307/3440026.
• Blanchflower, David G.; Oswald, Andrew J. (1995). "An introduction to the wage curve" (PDF). Journal of Economic Perspectives. 9 (3): 153–167. doi:10.1257/jep.9.3.153. ISSN 0895-3309. JSTOR 2138431.
• Blanchflower, David G.; Oswald, Andrew J. (2003). The wage curve. MIT Press. ISBN 978-0-262-51702-7.
• Blanchflower, David G.; Oswald, Andrew J. (2005). The wage curve reloaded. Cambridge, MA: NBER. doi:10.3386/w11338.
• Blanchflower, David G.; Oswald, Andrew J. (2008). "Wage curve". In Durlauf, Steven N.; Blume, Lawrence (eds.). The new Palgrave dictionary of economics (2nd ed.). Basingstoke: Palgrave Macmillan. doi:10.1057/978-1-349-95121-5_2544-1. ISBN 978-0-333-78676-5. Republished from * Blanchflower, David G.; Oswald, Andrew J. (2006). The Wage Curve: An Entry Written for the New Palgrave, 2nd Edition (PDF). IZA Discussion Papers. Vol. 2138. Institute of Labor Economics (IZA).
• Blien, Uwe; Dauth, Wolfgang; Schank, Thorsten; Schnabel, Claus (2013). "The Institutional Context of an 'Empirical Law': The Wage Curve under Different Regimes of Collective Bargaining". British Journal of Industrial Relations. 51 (1): 59–79. doi:10.1111/j.1467-8543.2011.00883.x. ISSN 0007-1080. Republished from Blien, Uwe; Dauth, Wolfgang; Schank, Thorsten; Schnabel, Claus (October 2009). The institutional context of an 'empirical law': The wage curve under different regimes of collective bargaining (PDF). hdl:10419/28396. ISSN 1615-5831.
• Boushey, Heather (2002). "Reworking the wage curve: Exploring the consistency of the model across time, space and demographic group". Review of Political Economy. 14 (3): 293–311. doi:10.1080/09538250220147859. ISSN 0953-8259.
• Campbell, Carl; Orszag, J.Michael (1998). "A model of the wage curve". Economics Letters. 59 (1): 119–125. doi:10.1016/S0165-1765(98)00018-4.
• Card, David (1995). "The Wage Curve: A review [Review of The Wage Curve., by D. G. Blanchflower & A. J. Oswald]" (PDF). Journal of Economic Literature. 33 (2): 785–799. JSTOR 2729028. ResearchGate:4722670.
• Fingleton, Bernard; Palombi, Silvia (2013). "The wage curve reconsidered: Is it truly an 'empirical law of economics'?" (PDF). Région et développement. 38: 49–92.
• Iacono, Roberto; Ranaldi, Marco (2020). "The wage curve across the wealth distribution". Economics Letters. 196 109580. doi:10.1016/j.econlet.2020.109580. hdl:11250/2686287.
• Longhi, Simonetta; Nijkamp, Peter; Poot, Jacques (2006). "Spatial heterogeneity and the wage curve revisited". Journal of Regional Science. 46 (4): 707–731. doi:10.1111/j.1467-9787.2006.00474.x. ISSN 0022-4146. (preprint)
• Longhi, Simonetta (2012). "Job competition and the wage curve". Regional Studies. 46 (5): 611–620. doi:10.1080/00343404.2010.521145. ISSN 0034-3404. (preprint). Republished from Longhi, Simonetta (February 2010). Job competition and the wage curve (PDF). IZA Discussion Paper. Vol. 4777. ResearchGate:45143596.
• Montuenga‐Gómez, Víctor M.; Ramos‐Parreño, José M. (2005). "Reconciling the wage curve and the Phillips curve" (PDF). Journal of Economic Surveys. 19 (5): 735–765. doi:10.1111/j.0950-0804.2005.00266.x. ISSN 0950-0804.
• Nijkamp, Peter; Poot, Jacques (2005). "The last word on the wage curve?". Journal of Economic Surveys. 19 (3): 421–450. doi:10.1111/j.0950-0804.2005.00254.x. hdl:10419/86003. Republished from Nijkamp, Peter; Poot, Jacques (2002). The last word on the wage curve? (PDF). Tinbergen Institute Discussion Paper. Vol. 02-029/3. Amsterdam and Rotterdam: Tinbergen Institute. hdl:10419/86003.
• Roberts, John M. (November 1997). The Wage Curve and the Phillips Curve (PDF). Board of Governors of the Federal Reserve System.
• Rokicki, Bartlomiej; Blien, Uwe; Hewings, Geoffrey J.D.; thi Hong Van, Phan (2021). "Is there a wage curve with regional real wages? An analysis for the US and Poland". Economic Modelling. 102 105582. doi:10.1016/j.econmod.2021.105582.
• Sessions, John G. (1993). "An exposition on the nature of the wage curve". The Scandinavian Journal of Economics. 95 (2): 239–244. doi:10.2307/3440409.
• Whelan, Karl (September 1997). Wage curve vs. Phillips curve: Are there macroeconomic implications?. Board of Governors of the Federal Reserve System Finance and Econ. Disc. Series. Vol. 97–51. doi:10.2139/ssrn.44610. hdl:10197/246.