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UNDERSTANDING RETURNS TO EDUCATION WHEN WAGES AND PRICES VARY BY LOCATION

By Dan Black, Natalia Kolesnikova and Lowell Taylor

Abstract

Abstract. In this paper we study whether location-speci…c price variation likely a¤ects 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 to generally pertain. Examination of the U.S. Census data (for 1980, 1990, and 2000) provides persuasive evidence that the return to a college education, relative to a high school education, does indeed vary widely across cities, e.g., in 1990 the return in Houston is 0.54 while in Seattle it is only 0.33. We provide theoretical reasons to suspect that the returns to education are relatively lower in expensive highamenity locations. We present evidence consistent with this prediction

Year: 2011
OAI identifier: oai:CiteSeerX.psu:10.1.1.194.8803
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