The Italian wage curve revisited: A local and spatial cointegration

This study investigates the effects of spatial interactions on local wages based on a panel data from 20 Italian provinces between 2004 and 2015. Using the Global Moran’s I statistic, we have provided empirical evidence for the presence of spatial dependencies in provincial wages. Then, we have estimated the provincial wage equation by using a dynamic spatial panel model as far region and time-period fixed effects are concerned to test the spatial cointegration that controls the spatial heterogeneity and spatial interdependence with other regional characteristics. Parameter estimations are obtained by reformulating the initial model in spatial first differences. The next estimation is done by using the error correction model representation of the dynamics spatial panel model. So, we have examined provincial wages effects and the extent to which a change in unemployment rate and explanatory variables in a particular region affect wages in other regions. The last estimation is obtained by comparing the performance of the spatial weights matrix, and as a result we have proved that the contagion matrix must be replaced by an inverse distance matrix.