Investigating a Wage Curve for New Zealand

Abstract

This paper examines evidence for a stable inverse relationship between the wages paid to workers and the unemployment rate across local labour markets in New Zealand, a phenomenon known as the wage curve. A variety of specifications of the wage curve are examined. Overall, weighted least squares estimates reveal a value of the unemployment elasticity of pay that is close to the international consensus estimate of— 0.1. Some support is also found for the concept of a positive long‐run relationship between wages and unemployment existing alongside the wage curve. However, there is evidence of potential endogeneity of the unemployment rate, although data limitations severely restrict the availability of suitable instruments.

Notes

Ph.D. student, Department of Economics, Cornell University

This paper is based on research that was undertaken for a Master of Commerce and Administration thesis at Victoria University of Wellington. In this respect, the author would like to acknowledge the invaluable contributions that were made by Associate Professors Jacques Poot and Philip Morrison. Useful comments on the current paper were also made by Sylvia Dixon and by an anonymous referee. The author was awarded the 2001 A.R. Bergstrom Prize in Econometrics for this paper.