Wage flexibility. Spatial labour markets

Do low-paid workers’ wage increases raise unemployment – and is this relevant for the minimum wage debate?

reads 18,587
Dieter von Fintel on 30 March 2016

Increasing the wages of workers in the bottom half of the wage distribution contributes less to regional unemployment than increasing the wages of better-paid workers. The wages of the worst-paid – who live in regions of low union and large-firm concentration – play almost no role in unemployment. Collective bargaining arrangements appear to explain these differences. This phenomenon may soften the negative impact of a national minimum wage on employment in the short run, but might make matters worse in the longer run.

How flexible is the South African labour market in the short and long run?

reads 30,976
Dieter von Fintel on 31 August 2015

The inflexibility of the labour market is commonly used as a scapegoat to explain high unemployment. Yet new evidence shows that only in specific contexts (unionized workers in the short run) does wage rigidity restrain the ability of the labour market to absorb workers. In the long run, wages are much more flexible and structural factors explain more of the unemployment puzzle. The policy debate on unemployment and wage flexibility needs to take these subtleties into account.