Real Wage Differentials Research Articles

THE NORTH–SOUTH DIVIDE: REAL WAGES AND WELFARE IN BRAZIL DURING THE EARLY 20THCENTURY

ABSTRACTWhat was the degree of Brazil's regional inequality in living standards during the first decades of the 20thcentury? This paper presents municipal and state information on wages and prices in order to build welfare ratios for skilled and unskilled workers between 1912 and 1940. Despite the significant differences in nominal wages and costs of living throughout the country, real wage differentials remained lower than those estimated by earlier studies. Williamson (1999) argued that real wages in the Southeast were approximately six times higher than in the Northeast during the 1930s. The new evidence in this paper suggests that wages were on average only 1.5 times higher.

Producing investment returns at the margin of finance: A frontier talent proposition

Institutional investment management requires expertise. In the “war-for-talent”, co-located private sector financial institutions drive wages up, thereby side-lining resource-constrained public pension funds and forcing them to outsource their investment functions. This article develops a frontier talent proposition based on a case-study of an atypical and exemplary U.S. public pension plan that produces competitive investment returns at-a-distance (geographically and economically) from financial agglomerations by internally managing 75 bn USD of retirement assets on a tight budget. Combining labour market statistics and close-dialogue with 37 investment professionals, the case-study documents original comparative advantages of the periphery relative to financial agglomerations in talent recruitment. It contributes new insights on geographical differences in real wages and the quality of life of finance workers. Looking ahead, the article suggests the relevance of frontier talent to a larger set of financial institutions facing increasing difficulties to staff their organisations in top-tier financial centres.

On the cyclicality of real wages and wage differentials

Abstract Previous empirical literature suggests that estimated wage cyclicality depends on the structure of the relationship between real wages and an observed indicator of the business cycle that econometric models impose prior to estimation. This paper, alleviates the problem of imposing such structure by searching directly for the largest common cycles in longitudinal microdata using a Bayesian dynamic latent factor model. We find that the comovement of real wages is related to a common factor that exhibits a significant but imperfect correlation with the national unemployment rate. Among others, our findings indicate that the common factor explains, on average, no more than 9% of wage variation, it accounts for 20% or less of the wage variability for 88% of the workers in the sample and roughly half of the wages move procyclically while half move countercyclically. These facts are inconsistent with claims of a strong systematic relationship between real wages and business cycles.

Persistence of Regional Wage Differences in China

Regional wage differences in China appear to be persistent and even to have grown over the past two decades. We study potential explanations for this phenomenon. After adjusting for the difference in the cost of living across provinces, we find that some of the cross-province differences in real wages could be related to the quality of labour, industry composition and geographic location of provinces. These factors, taken together, explain approximately half of the cross-province real wage variation. Interestingly, we find that interprovincial government transfers have not offset regional wage differences during the time period we consider. We also demonstrate that interprovincial migration, while driven in part by levels and changes in wage differences across provinces, did not help offset these differences. These results are consistent with findings in the literature that cross-province labour mobility in China is still limited.

The role of migration in regional wage convergence: Evidence from Sweden 1860–1940

Sweden experienced a decline in inter-county real wage differentials for agricultural workers between 1860 and 1940, historical evidence of early labor market integration well before widespread unionization in agriculture occurred. By means of dynamic panel data analysis, this paper examines whether internal and external migrations caused real wage beta convergence across Swedish counties. To account for statistical problems such as endogeneity of migration, time-invariant county characteristics and autocorrelation in the regression model, we adjust our estimates using fixed effects, instrumental variables and GMM. The preferred model shows that both internal and external migrations contributed to wage convergence before the First World War and internal migration mainly during the interwar years. The agglomeration effects of urbanization were not sufficiently pervasive to offset the labor supply effects of internal and external migrations.

REGIONAL HETEROGENEITY IN WAGE DISTRIBUTIONS: EVIDENCE FROM SPAIN*

ABSTRACT Regional differences in real wages have been shown to be both large and persistent in the United States and the U.K., as well as in the economies of other countries. Empirical evidence suggests that wage differentials adjusted for the cost of living cannot only be explained by the unequal spatial distribution of characteristics determining earnings. Rather, average wage gap decomposition reveals the important contribution made by regional heterogeneity in the price assigned to these characteristics. This paper proposes a method for assessing regional disparities in the entire wage distribution and for decomposing the effect of differences across regions in the endowments and prices of the characteristics. The hypothesis forwarded is that the results from previous studies obtained by comparing average regional wages may be partial and nonrobust. Empirical evidence from a matched employer–employee dataset for Spain confirms marked differences in wage distributions between regions, which do not result from worker and firm characteristics but from the increasing role of regional differences in the return to human capital.

SOMETIMES CLOSE IS GOOD ENOUGH: THE VALUE OF NEARBY ENVIRONMENTAL AMENITIES*

ABSTRACT An extensive empirical literature exists, showing that variations in region‐specific amenities can account for persistent differences in real wages across regions. However, this literature has considered only amenities in the same location as the household. This paper argues that environmental amenities at some distance from but accessible to urban areas may lead to negative compensating wage differentials. We use a general equilibrium framework and data from the 1995 Current Population Survey to calculate implicit amenity prices based on measures of distance to environmental amenities. Our results suggest that amenities outside the metropolitan area do generate compensating wage differentials, as workers are willing to accept lower wages to live in accessible proximity to “nice” places. This implies that these places provide a positive externality to those communities that find them accessible. The estimated effects are quantitatively important, suggesting that these externalities should be taken into account in policy making.

Regional economic impacts of a plant disease incursion using a general equilibrium approach*

The present study uses a dynamic multiregional computable general equilibrium (CGE) model to estimate the micro- and macroeconomic effects of a hypothetical disease or pest outbreak. Our example is a Karnal bunt incursion in wheat in Western Australia. The extent of the incursion, the impact of the disease or pest on plant yields, the response of buyers, the costs of eradication and the time path of the scenario contribute to outcomes at the industry, regional, state and national levels. We decompose the contribution of these individual direct effects to the overall impact of the incursion. This might provide some guidance regarding areas for priority in attempting to eradicate or minimise the impacts of a disease or pest. The study also introduces a theory of dynamic regional labour adjustment in which economic events may lead to both real wage differentials and worker migration between regions.

Do migrants follow market potentials? An estimation of a new economic geography model

New Economic Geography models describe a cumulative process of spatial agglomeration: Firms tend to cluster in locations with good access to demand, and similarly, workers are drawn to regions where market potential is high because the price index is lower there. This paper provides an empirical assessment of this forward linkage that relates labour migrations to the geography of production through real wage differentials. In the spirit of Hanson (1998), we use bilateral migration data for five European countries over the 1980s and 1990s to perform quasi-structural estimations of a new economic geography model derived from Krugman (1991). The results show strong evidence in favor of this model. As expected, migrants do follow market potential. Moreover, we provide estimates for all key parameters of the model. These estimates suggest that a sudden emergence of a core-periphery pattern is unlikely within European countries: centripetal forces are too limited in geographical scope, and mobility costs are too high.

Do migrants follow market potentials? An estimation of a new economic geography model

New Economic Geography models describe a cumulative process of spatial agglomeration: Firms tend to cluster in locations with good access to demand, and similarly, workers are drawn to regions where market potential is high because the price index is lower there. This paper provides an empirical assessment of this forward linkage that relates labour migrations to the geography of production through real wage differentials. In the spirit of Hanson (1998), we use bilateral migration data for five European countries over the 1980s and 1990s to perform quasi-structural estimations of a new economic geography model derived from Krugman (1991). The results show strong evidence in favor of this model. As expected, migrants do follow market potential. Moreover, we provide estimates for all key parameters of the model. These estimates suggest that a sudden emergence of a core-periphery pattern is unlikely within European countries: centripetal forces are too limited in geographical scope, and mobility costs are too high.

Growth, development, and innovation: A look backward and forward

Abstract. This article reviews where we have come from and where we are going in research on regional growth and development. Our object of study is the region, an imprecise term that has been taken to mean areas as large as small countries or as small as urban regions, although how regions are defiend does itself have implications for both theories and the empirics of regional growth. How growth occurs remains a poorly understood process. Clearly the basic ingredients of the neo‐classical cookbook are important – growth in capital and labour stocks with technological change – but they are neither enough nor revealing enough. Why does the stock of capital grow at different rates? Why does the labour supply increase? What drives technical progress? What are the roots of spatial dependence? We are fairly certain that the answers to these questions embrace agglomeration economies but they also embrace much more. Innovation is associated with research and development and has an identifiable spatial pattern in relation to highly skilled labour and institutions such as universities. But innovation is not just the result of R&D but also entrepreneurship applied to investment. Labour supply responds to real wage differentials but also to environmental and other amentities. Labour is far more geographically mobile in the New World, however, than it is in the Old.

The Determinants of Immigration from Fiji to New Zealand: An Empirical Reassessment using the Bounds Testing Approach

AbstractThis article re‐examines Gani's (1998) findings on the determinants of migrant flows from Fiji to New Zealand by employing the bounds testing procedure to cointegration, within an autoregressive distributive lag framework. The main findings are that in the long run all variables are statistically insignificant, although correctly signed with the exception of the unemployment differential. In the short run, in sharp contrast to Gani's (1998) findings, political instability is consistently the most important determinant of migration flows while the standard of living and real wage differentials are statistically insignificant across all specifications.

WAGE DIFFERENTIALS ACROSS LABOR MARKETS AND WORKERS: DOES COST OF LIVING MATTER?

Wage differential studies rarely account for interarea differences in cost of living, owing both to data limitations and theoretical ambiguity. This study develops a price index for 185 metropolitan areas comprising about 70% of the U.S. labor force. Current Population Survey data for 1985–95 and data on site‐specific amenities are used to estimate earnings differentials based on nominal wages, wages fully adjusted for measured cost of living, and a simple approximation of “real” wages with partial adjustment for price‐level differences. Dispersion in approximate real wages across 185 labor markets and differentials by region and city size are substantially lower than dispersion in nominal or full adjustment wages. Estimates of racial and ethnic differentials display moderate sensitivity to choice of a wage measure, whereas other standard differentials do not. Both nominal wages and wages fully adjusted for cost of living may provide misleading estimates of real wage differentials. Absent data on interarea prices and amenities, researchers should include detailed controls for region and city size in nominal wage equations. (JEL J31, R23)

The Implications of Demographic-Specific Inflation Rates for Trends in Real Educational Wage Differentials

We use data from consumer expenditure surveys to investigate the impact on trends in real wage differentials of using group-specific price indexes. We find that inflation rates decrease monoton-ically with the education of the household head throughout the 1970s and early 1980s, and real educational wage differentials, calculated using education-specific price indexes, widened somewhat more than nominal differentials. We also find that differences by education level in fuel and energy consumption, whose relative prices increased during the 1970s, account for the majority of the educational index differences.

The Implications of Demographic-Specific Inflation Rates for Trends in Real Educational Wage Differentials

The Implications of Demographic-Specific Inflation Rates for Trends in Real Educational Wage Differentials

NONSUBSTITUTION THEOREMS FOR A SMALL TRADING COUNTRY

AbstractThis paper proves a nonsubstitution theorem for small trading economies, under quite plausible conditions. Conditions are established under which the consumption possibility set for an economy that has nontradeable factors of production and nontradeable consumption goods is bounded by a hyperplane, rather than by a curved surface. The theorem allows the possibility that the prices of nontradeable factors, and hence the incomes of their owners, may depend on domestic supplies of nontradeable factors. It is concluded that the equilibrium wage and the equilibrium prices of all consumption goods are independent of domestic endowments or the shape of demand functions. The theorem tends to strengthen the view that, in the absence of trade barriers, differences in real wages across countries cannot be explained by differences in resource endowments.

Income, Residential Location, and Mode Choice

Commuters choose a mode, defined in terms of trip speed and time, to minimize the money and opportunity costs of travel. New results: the wage-rate elasticity of marginal commuting cost may be zero, negative, greater than one, or declining with the wage rate; a constant wage-rate elasticity is possible only if the marginal money cost of commuting is zero; a positive value of the marginal money cost of commuting implicitly assumes mode choice. The relationship between income and location seems due largely to technological change in intraurban transportation, differences in the money cost of commuting by alternative modes, and differences in real wages.

International Macroeconomic Interdependence and International Migration of Labour

International migration of labour (IML) has been very little analysed in the context of a macroeconomic framework. This paper incorporates IML into a macroeconomic model and examines its policy implications. We extend a standard macroeconomic model by allowing real consumption-wage differentials to affect labour supply flows. Our analysis shows that even in the case of an inelastic labour supply with market clearing, IML generates interdependence by allowing fiscal disturbances to be transmitted between countries. More specifically, we show that a foreign fiscal contraction, by reducing the foreign consumption wages, induces out-migration of labour which, over time, reduces foreign output and raises domestic output. We also show that the higher the degree of IML, the shorter the period during which real wage differentials between countries persist.

European Integration and External Constraints On Social Policy: Is a Social Charter Necessary?

This article examines the conditions under which social policy would be constrained by European economic integration and assesses whether a Social Charter is needed. It provides a framework for interpreting the ‘principle of subsidiarity’, examines the potential for a direct effect of social benefits on the movement of people within the EC, investigates the impact of the taxes used to finance social policy on the location of businesses and people and the incidence of these taxes. As the degree of labour mobility in response to differences in real wages between EC countries is demonstrated to be crucial in deciding whether a Social Charter is necessary, a substantial part of the paper examines the evidence on the responsiveness of labour mobility, and it suggests little need for a Social Charter.

Intermetropolitan Wage Disparities and Industrial Change

This paper examines the changing regional geography of wages within the United States during the recent period of economic and employment restructuring. Economic restructuring has been accompanied by widespread attempts to reduce direct wage costs and, more generally, by a realignment of labor relations away from union negotiated wage agreements. We investigate the geography of wage change, using hourly wage data drawn from Bureau of Labor Statistics' Area Wage Surveys. Our analysis provides little evidence of an erosion of real wage differentials at the scale of census regions. Rather, the tendency is towards increasing intraregional variance in wages, especially within the north central United States, reflecting the geographically uneven effects of restructuring within regions.