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Wage Differentials Across Labor Markets and Workers:
Does Cost of Living Matter?


J. Michael Dumond


Florida State University

Barry T. Hirsch


Georgia State University; Institute for the Study of Labor (IZA)

David A. MacPherson


Trinity University; Institute for the Study of Labor (IZA)


Economic Inquiry, Vol. 37, No. 4, October 1999

Abstract:     
Theory and evidence indicate that wage rates across labor markets adjust only partially with respect to differences in consumer prices. Earnings differentials are estimated for 185 labor markets during 1985-95, following control for worker and area characteristics, based on nominal wages, wages fully adjusted for price level, and an approximation of "real" wages with partial adjustment for price level. Dispersion in partial adjustment wages across markets, and differentials by region and city size, are substantially lower than dispersion in either nominal or full adjustment wages. Racial and ethnic differentials display moderate sensitivity to choice of a wage measure. Researchers should avoid full adjustment for area prices. Absent data on prices and amenities, one should include detailed controls for region and city size in nominal wage equations.

JEL Classification: J31, R23

Accepted Paper Series


Date posted: October 12, 2000  

Suggested Citation

Dumond, J. Michael, Hirsch, Barry T. and MacPherson, David A., Wage Differentials Across Labor Markets and Workers: Does Cost of Living Matter?. Economic Inquiry, Vol. 37, No. 4, October 1999. Available at SSRN: http://ssrn.com/abstract=208708

Contact Information

J. Michael Dumond
Florida State University ( email )
Tallahassee, FL 32306
United States
Barry T. Hirsch (Contact Author)
Georgia State University ( email )
Department of Economics
Andrew Young School of Policy Studies
Atlanta, GA 30302-3992
United States
404-413-0880 (Phone)
404-413-0145 (Fax)
HOME PAGE: http://www2.gsu.edu/bhirsch

Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany

David A. MacPherson
Trinity University ( email )
San Antonio, TX 78212
United States
210-999-8112 (Phone)
210-999-7255 (Fax)
HOME PAGE: http://www.davemacpherson.com
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
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