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

See all articles by Dan Black

Dan Black

University of Chicago - Harris School of Public Policy

Natalia Kolesnikova

Federal Reserve Bank of St. Louis

Lowell J. Taylor

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management

Date Written: July 1, 2008

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 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

Black, Dan and Kolesnikova, Natalia and Taylor, Lowell J., Earnings Functions When Wages and Prices Vary by Location (July 1, 2008). Federal Reserve Bank of St. Louis Working Paper No. 2007-031B. Available at SSRN: https://ssrn.com/abstract=1010327 or http://dx.doi.org/10.2139/ssrn.1010327

Dan Black (Contact Author)

University of Chicago - Harris School of Public Policy ( email )

1155 East 60th Street
Chicago, IL 60637
United States

Natalia Kolesnikova

Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Lowell J. Taylor

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

Pittsburgh, PA 15213-3890
United States
412-268-3278 (Phone)
412-268-7036 (Fax)

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