Nonlinear Wage Responses to Internal and External Factors

Abstract

The paper tests whether or not the effects on sectoral wages of internal and external factors depend upon the sector’s relative wage position. The key hypothesis is that workers in low—wage sectors are more concerned with relative wages than workers in high wage sectors. To test the hypothesis, we make use of panel data and formulate a smooth transition regression model including relative wages as the transition variable. The empirical results provide strong evidence of nonlinear wage responses to industry profitability, outside wages and unemployment. The estimated long—run insider weight and the unemployment effect are much higher in high—wage industries than in low—wage industries. The main results are robust to alternative transformations of the unemployment rate and we also provide some evidence of nonlinear effects using regional panel data.