Employee compensation in European regions: A spatial analysis of short- and long-term effects

Some European countries have recently experienced stagnation or decline in employee compensation, highlighting the need to investigate its causes to develop policies that support economic well-being and competitiveness. Using a dynamic spatial Durbin panel model and data from 242 European regions from 2008 to 2020, this study explores key socio-demographic, economic, and institutional factors affecting employee compensation. The estimation approach accounts for both spatial and temporal dimensions, allowing the assessment of short- and long-term direct and spillover effects associated with each predictor. The results show significant spatial dependencies, with GDP per capita positively influencing compensation in the short-run, while education negatively due to skill mismatches. Institutional quality contributes to higher compensation levels both in the short- and long-term, highlighting effective governance's role. Statutory minimum wages have negative direct effects in the short-run and positive spillovers in the long-run.