NBER Working Paper: Location affects wages

1 min read
August 27, 2023

Location, Location, Location by David Card, Jesse Rothstein & Moises Yi, a recent working paper delves into the role of industry factors and geographical location (or lack of one) in shaping wage disparities across commuting zones (CZs) in the United States. The study aims to unravel the complex relationships between industry composition, place effects, and wage differences.

Key Findings:

  • Interaction of Industry and Place Effects: The research employed a comprehensive statistical model to analyze the interplay between industry-specific factors and geographical location on wages. Notably, the combined influence of industry and place effects accounted for a whopping 87.3% of wage variability, indicating that the impact of CZ-wide effects remains consistent even when industry effects are considered.
  • Role of Industry Composition: While industry size and agglomeration effects contribute to local wage differences, their net effect is limited, explaining only 1-2% of the overall variance in CZ-industry wage differences. This underlines the relatively stable distribution of industries across CZs.
  • Decomposition of CZ-Mean Effects: The study reveals that pure locational wage premiums dominate, explaining over 90% of the variation. Interestingly, industry composition effects accounted for only 2.5% of the variation, reinforcing that industry composition plays a minor role in understanding average CZ wage premiums.
  • Impact of Education: The wage gap between college graduates and non-college workers is steeper in larger CZs. A significant portion of this widened gap is attributed to sorting higher-skilled, college-educated workers into larger CZs and high-wage industries.
  • Housing Costs and Earnings: Contrary to a separate study by Diamond and Moretti (DM), the research found housing costs’ elasticity to be greater than 0.2, indicating that nominal wages need a size elasticity of around 0.07 to offset higher living costs.

What They Are Saying: The study elucidates the multifaceted relationships between industry factors, geographical location, and wage disparities in the US. While industry composition and agglomeration effects have a role, the predominant contributors to wage differences are place effects and individual worker skills. The interplay between education, industry composition, and housing costs further complicates the wage landscape, underscoring the complexity of factors determining local wage disparities.

Why it Matters: Wage disparities, influenced by industry, geography, housing costs, and education, significantly impact fertility rates and family formation. Stable and higher wages along with affordable housing encourage family formation and childbearing. In contrast, regional wage variability leads to population migration, affecting local demographics. Hence, policymakers must understand and address these relationships to foster stable, prosperous communities and encourage positive demographic trends.

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