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Earnings Functions When Wages and Prices Vary by Location

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  • Dan Black
  • Natalia Kolesnikova
  • Lowell Taylor

Abstract

Economists generally assume, implicitly, that "the return to schooling" is invariant across local labor markets. We demonstrate that this outcome pertains if and only if preferences are homothetic-a special case that seems unlikely. Our theory predicts that returns to education will instead be relatively low in expensive high-amenity locations. Our analysis of U.S. data provides support for this contention; returns to college are especially low in such cities as San Francisco and Seattle. Our findings call into question standard empirical exercises in labor economics that treat the returns to education as a single parameter. (c) 2009 by The University of Chicago.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 27 (2009)
Issue (Month): 1 (01)
Pages: 21-47

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Handle: RePEc:ucp:jlabec:v:27:y:2009:i:1:p:21-47

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Citations

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Cited by:
  1. Backman, Mikaela, 2013. "Regional Variation of Returns to Education," Working Paper Series in Economics and Institutions of Innovation 300, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
  2. Julie L. Hotchkiss & Menbere Shiferaw, 2011. "Decomposing the education wage gap: everything but the kitchen sink," Review, Federal Reserve Bank of St. Louis, issue July, pages 243-272.
  3. Cinzia, Rienzo, 2010. "Real Wages, Wage Inequality and the Regional Cost-of-living in the UK," MPRA Paper 36390, University Library of Munich, Germany, revised Oct 2010.
  4. Edward L. Glaeser & Matthew G. Resseger & Kristina Tobio, 2008. "Urban Inequality," NBER Working Papers 14419, National Bureau of Economic Research, Inc.
  5. Suhonen, Tuomo, 2013. "Are there returns from university location in a state-funded university system?," Regional Science and Urban Economics, Elsevier, vol. 43(3), pages 465-478.
  6. Dan Black & Natalia Kolesnikova & Seth Sanders & Lowell Taylor, 2013. "The role of location in evaluating racial wage disparity," IZA Journal of Labor Economics, Springer, vol. 2(1), pages 1-18, December.
  7. Sand, Benjamin M., 2013. "A re-examination of the social returns to education: Evidence from U.S. cities," Labour Economics, Elsevier, vol. 24(C), pages 97-106.
  8. Thomas A. Garrett & Natalia Kolesnikova, 2010. "Local price variation and the tax incidence of state lotteries," Working Papers 2010-035, Federal Reserve Bank of St. Louis.
  9. Kim, Dongsoo & Liu, Feng & Yezer, Anthony, 2009. "Do inter-city differences in intra-city wage differentials have any interesting implications?," Journal of Urban Economics, Elsevier, vol. 66(3), pages 203-209, November.
  10. Tuomo Suhonen & Jaakko Pehkonen & Hannu Tervo, 2011. "Spatial variation in the development of the return to university education in Finland, 1970-2004," ERSA conference papers ersa10p1351, European Regional Science Association.
  11. Enrico Moretti & Daniel J. Wilson, 2013. "State Incentives for Innovation, Star Scientists, and Jobs: Evidence from Biotech," Upjohn Working Papers and Journal Articles 14-203, W.E. Upjohn Institute for Employment Research.
  12. Peter McHenry, 2011. "The Relationship between Location Choice and Earnings Inequality," Working Papers 112, Department of Economics, College of William and Mary.
  13. Lindley, Joanne & Machin, Stephen, 2014. "Spatial changes in labour market inequality," Journal of Urban Economics, Elsevier, vol. 79(C), pages 121-138.
  14. Lindley, Joanne & Machin, Stephen, 2013. "Spatial Changes in Labour Market Inequality," IZA Discussion Papers 7600, Institute for the Study of Labor (IZA).
  15. Moretti, Enrico, 2010. "Local Labor Markets," CEPR Discussion Papers 7818, C.E.P.R. Discussion Papers.
  16. Dionissi Aliprantis, 2013. "Covariates and causal effects: the problem of context," Working Paper 1310, Federal Reserve Bank of Cleveland.
  17. Katie Fitzpatrick & Jeffrey Thompson, 2009. "The Interaction of Metropolitan Cost-of-living & the Federal Earned Income Tax Credit: One Size Fits All?," Working Papers wp204, Political Economy Research Institute, University of Massachusetts at Amherst.

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