Amenities and regional differences in returns to worker characteristics

Abstract

Average wages in regions in the United States vary considerably. In trying to explain these differences in the average wage across regions a number of studies have found that differences in the returns to characteristics of workers, such as years of schooling, are as important as differences in the skill composition of the labor force [4, 6, 10, 141. These differences in returns are generally interpreted as reflecting regional differences in demand for worker characteristics coupled with barriers to factor mobility. This interpretation is based on the argument that “the presence of at least one perfectly mobile factor, with perfect information will cause spatial convergence in characteristic prices, as that particular factor exploits any spatial price differential” [4, p. 2161. This paper suggests an alternative to this demand-based explanation for regional differences in the structure of wages, one based on regional differences in the supply of worker characteristics.’ This explanation does not rely on impediments to the movement of workers or firms and is consistent with an equilibrium view of wages in which regional wage differentials are viewed as compensation for local amenities. The theoretical model, presented in the following section, assumes capital and labor are perfectly mobile, with perfect information implying that in equilibrium the utility of workers with similar characteristics is the same in all locations. This convergence of utility, however, does not necessarily imply convergence of characteristic prices. Equilibrium differences in the returns to a specific worker characteristic can exist if worker characteristics affect an individual’s valuation of an area’s amenities relative to the individual’s demand for land.