Earnings Functions When Wages and Prices Vary by Location
Federal Reserve Bank of St. Louis Working Paper No. 2007-031B
38 Pages Posted: 11 Sep 2007
Date Written: July 1, 2008
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 which treat the returns to education as a single parameter.
Keywords: earnings functions, return to education, local labor markets
JEL Classification: J24, J31, R23
Suggested Citation: Suggested Citation