Essays on Interarea Wage Determination

This dissertation consists of two essays concerning the determination of wages across areas. The first essay investigates the equilibrium relationship between wages and prices across labor markets. Of central interest is the extent to which workers receive higher wages to compensate for differences in the cost of living. According to the spatial equilibrium hypothesis, the utility of homogenous workers should be equal across labor markets. This implies that controlling for amenity differences across areas, the elasticity between wages and the general price level across areas should equal one, at least under certain conditions. We test this hypothesis and find that the predicted relationship holds when housing prices are measured by rents and the general price level is instrumented to account for measurement error. When housing prices are measured by housing values, however, the wage-price elasticity is significantly less than one, even using instrumental variables. Rents reflect the price paid for housing per unit of time and are arguably the superior measure. Thus, findings in this essay provide support for the full compensation hypothesis. These findings also have important implications for researchers estimating the implicit prices of amenities or ranking the quality of life across areas. The second essay uses a national level dataset and a spatial econometric framework to examine the effects of teacher unions and other school district characteristics on teacher salaries. The results confirm that salaries for both experienced and beginning teachers are positively affected by salaries in nearby districts. Investigations of the determinants of teacher salaries that ignore this spatial relationship are likely to be misspecified. We find that union activity increases salaries for experienced teachers by as much as 16-21 percent but increases salaries for beginning teachers by a considerably smaller amount. This result is consistent with predictions from a median voter model.