Implementing a multilateral transitive price index

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Date

2001-12

Authors

Gorney, Anne Ley

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Abstract

Using a new multilateral transitive price index, this dissertation examines three topics in regional and labor economics. Building on a disaggregated index developed by Kokoski, Cardiff, and Moulton, the research makes the index workable by aggregating it to an all-items level and expanding it through time for forty-three Metropolitan Statistical Areas and region-population size categories. This price index is used to examine whether real wage differentials exist, the implicit price of amenities, and the returns to interregional migration. Real wage differentials among regions are found to persist after prices are carefully considered through the use of the index developed in this dissertation. There is no narrowing of the real wage distribution overall, or between areas, compared to the nominal wage distribution. Although the magnitudes of the differentials are very similar, the pattern of wage differentials changes dramatically once prices are considered. Real wage differentials exist, but in a vii completely different manner than nominal wage differentials. The degree to which individual compensation reflects the value of regional amenities is the second topic of study. Using a single-equation methodology, the nonlinearities in the relationship between amenities and real wages are explored, as is the effect of controlling for prices as a dependent variables and the effect of not controlling for prices at all. The results are different in magnitude than those in almost all previous studies. In the third research area, a two-regime model that corrects for selectivity bias is estimated for both real and nominal wages in 1991. Individuals who migrated in any of the previous thirteen years were found to earn more than their non-migrant counterparts, but the act of migrating hurt their wages compared to predicted counterfactual wages in the non-migrant regime. In all cases studied, the inclusion of a multilateral transitive price index altered the magnitude, and often the direction, of the results. Because prices are controlled for in a precise manner, the results can be examined in light of the working of regional labor markets with less concern that the results are driven by differences in regional prices.

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