The wage curve and local monopsony power

Abstract

Using longitudinal micro-data from Finland, a country with a geographically dispersed population and relatively long distances between local labor markets, this paper examines the responsiveness of the pay level to local unemployment conditions. In particular, this study tests the hypothesis that the pay level is more responsive to the unemployment level in less agglomerated and more remote regions as might be expected if employers have a higher degree of monopsony power in such regions. The results consistently suggest that the pay level is lower in localities with a higher unemployment level and, hence, provide strong support for the so-called wage curve hypothesis, which predicts that a negative relationship exists between local unemployment and the pay level. Although the results provide some evidence that the magnitude of the regional pay–unemployment relationship varies across different regions of the country, the findings do not provide consistent support for the monopsony power hypothesis. In particular, after controlling for unobserved worker heterogeneity, the responsiveness of the pay level to the local unemployment conditions is similar across regions with different degrees of economic agglomeration.