The more difficult requirement for the instrument is that it is uncorrelated with the error term of equation (1), or that it not appear in the wage equation. Because unemployment rates in geographical areas may be persistent over time, and because many individuals may remain in the same geographical area, past unemployment rates may be correlated with contemporaneous unemployment rates, which may in turn affect current wages (see, e.g., Blanchflower and Oswald, 1990). To handle this potential problem, the contemporaneous unemployment rate is added as a control variable in equation (1). direct payday loan lenders
However, a direct role for early unemployment rates cannot be decisively ruled out, even controlling for contemporaneous unemployment rates. There is, in fact, some existing work on the relationship between current wages, current unemployment rates, and past unemployment rates. In particular, Beaudry and DiNardo (1991) show that in a model with implicit labor market contracts and costly mobility, the unemployment rate at time of hire is related to the current wage, even taking account of the current unemployment rate. On the other hand, in a model with relatively costless mobility, the lowest unemployment rate since beginning the job influences the current wage, again independently of the current unemployment rate. Moreover, in this case earlier unemployment rates (other than the minimum) do not affect the contemporaneous wage. The evidence Beaudry and DiNardo present, using PSID and CPS data, suggests that the latter characterization better fits the data, as it is the lowest unemployment rate since beginning the job that has a significant, robust negative effect on the wage, and once this unemployment rate is included, neither the unemployment rate at the start of the job nor the current rate is significantly associated with the wage.