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Title: Understanding Returns to Education when Wages and Prices Vary by Location

Citation Type: Working Paper

Publication Year: 2005

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Abstract: In this paper we study whether location-specic price variation affects statistical inference and theoretical interpretation of human capital earnings functions. We demonstrate, in a model of local labor markets, that the "return to schooling" is constant across locations if and only if preferences are homothetic--a special case that seems unlikely to generally pertain. Examination of the U.S. Census data (for 1980, 1990, and 2000) provides evidence that the return to a college education, relative to a high school education, does indeed vary widely across cities, e.g., in 1990 the return in Houston is 0.54 while in Seattle it is only 0.33. We provide theoretical reasons to suspect that the returns to education are relatively lower in expensive high-amenity locations, and present evidence consistent with this prediction. Finally, we raise concerns about standard empirical exercises in labor economics which treat the returns to education as a single parameter.

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Authors: Kolesnikova, Natalia; Taylor, Lowell; Black, Dan

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Data Collections: IPUMS USA

Topics: Education, Labor Force and Occupational Structure

Countries: United States