Testing for unit roots in panel data: are wages on different bargaining levels cointegrated?

Abstract

Theoritical considerations suggest that spillover forces equalize wages for similar jobs. Thus, it is expected that firm wages are cointegrated with the corresponding wage rates on an industrial level. In this paper we apply various unit root tests to a panel of wage data. We show that the familiar techniques can be adopted to this type of data allowing for unobserved heterogeneity and common time effects. Our results suggest that firm and industry wages both possess a unit root in the autoregressive representation. However, ther is only weak evidence for a cointegration realtionship.