Specification of wage determination mechanisms in urban labor markets

Research into wage determination and inflation at the level of the urban labor market has generally followed a Phillips curve adaptive expectations framework. This paper explores the accuracy of such specifications when national and intermarket linkages are ignored, and extends such specifications to incorporate these linkages. The present research also addresses the impact of serial correlation problems and time series aggregation bias on the ability to identify the local wage determination and inflation mechanism. The estimation results for both annual and quarterly specifications indicate that there is virtually no support for a Phillips curve adaptive expectations hypothesis when external linkages are included in the equations. It is demonstrated that specification errors and serial correlation problems are probably responsible for many of the contradictory and inconclusive results obtained in previous studies.