The Uk Wage Curve: New Evidence from the British Household Panel Survey

This paper assesses the existence of a UK ‘wage curve’ to explore the role of regional unemployment in the determination of individual pay. Recent empirical research adheres to the existence of a new empirical law of economics, a stable inverse non-linear relationship between individual pay and the local unemployment rate. Critiques of this research emphasise issues concerning choice of econometric technique and potential bias that arise from the use of time-series and cross-section data. This paper estimates the UK wage curve using longitudinal micro data drawn from the first eight waves of the British Household Panel Survey. We estimate a fixed-effects model that controls for observed and unobserved individual-specific heterogeneity, and find evidence of a significant negative relationship in wage-unemployment space. Our results indicate that the estimated unemployment elasticity of pay for UK males is approximately -0.14, and this elasticity is robust to a number of alternative specifications. There is no evidence of a significant wage curve for women. These findings are consistent with panel studies reported for other countries. They contrast with previous empirical studies for the UK, however, in that they reject the inclusion of higher order polynomial terms for unemployment. Thus, the main findings of the paper are that the wage-unemployment relationship is robust but not as non-linear as had been previously thought. JEL Classification: C23, J30, J60