Long-term unemployment and US State wages

Abstract

During the 1980s, rising European unemployment without rapidly subsiding wage pressure challenged conventional labour market theories. One explanation is that a greater proportion of unemployment that is long-term unemployment (LTU) reduces downward wage pressure. Empirical evidence regarding this proposition is mixed, where it is possible the relationship varies across countries. Hence, this study examines the LTU-wage relationship for the US using 1976–91 state-level data. The results suggest that a greater LTU proportion is positively related to wages, but the result should be interpreted cautiously. Thus, US labour markets may be ‘tighter’ than previously suspected.