Topics on Wage Differences Across Local Labor Markets

Abstract

It is well established that average wages differ across local labor markets. Researchers have found that this is partially explained by differences of worker ability, as reflected in observable dimensions of worker skill, such as education and labor market experience. However, the classical human capital explanation only partially explains differences in wages across metropolitan areas. In my dissertation, I consider two variations from this framework to explain why wage differentials across observably homogeneous workers persist. First, I consider the role of unobserved dimensions of worker skill and the level of location amenities. I do this in the context of professional basketball, where worker skill and non-pecuniary employer characteristics are unusually well measured. I find strong evidence in support of the compensating differentials theory in this context. The analysis also demonstrates that when important measures of worker skill are omitted from the specification, the quality of the results is distorted and inference on the validity of the theory is misleading. The work also suggests that certain specifications are sensitive to when we do not control for important portions of worker skills. The partially linear and the classic linear regression models outperform the Box-Cox alternatives in matching the hedonic estimates produced in the "full" specification case. Second, I ask whether firms in a local market can exploit individual mobility costs and offer workers wages that are lower than the competitive rate. I describe a wage renegotiation model in which firms use information on worker mobility and on local labor market competition. The model predicts that workers with positive mobility costs receive lower wages, while the ability of firms to exploit these costs declines in the intensity of local competition. To test this model, I construct measures of individual mobility costs and occupation-specific measures of local labor market competition. I find that individual mobility costs have a negative effect on wages and that this effect gets weaker the more competitive is the local labor market. Finally, the negative effect of mobility costs on wages is significantly lower for workers in highly unionized occupations, where individual wage renegotiation is less likely to occur.