Full Citation
Title: Earnings Functions When Wages and Prices Vary by Location
Citation Type: Working Paper
Publication Year: 2007
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Abstract: In this paper we study whether location-specific price variation likely affects statistical inference and theoretical interpretation in the empirical implementation of human capital earnings functions. We demonstrate, in a model of local labor markets, that the "return to schooling" is a constant across locations if and only if preferences are homothetic/a special case that seems unlikely. Our theory predicts that the returns to education will be relatively lower in expensive high-amenity locations. Examination of U.S. Census data for 1980, 1990, and 2000, suggests that the return to a college education, relative to a high school education, varies widely across metropolitan areas (e.g., in 1990 the return in Houston is 0.54 while in Seattle it is only 0.33), and the return to education is generally lower in expensive locations. Our findings call into question 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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Publication Number: 2207-031B
Institution: Federal Reserve Bank of St. Louis
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Data Collections: IPUMS USA
Topics: Labor Force and Occupational Structure, Other
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