Regional Wage Convergence and Divergence: Adjusting Wages for Cost-of-Living Differences

One of the basic tenets of economics is that the mobility of labor and capital tends to equalize prices across markets. This tendency toward price convergence is particularly notable across regional markets in the United States. For as long as regional income data have been collected, per capita income and wage rates have generally become more alike. In light of this long-run trend, a surprising reversal has occurred in several regional price measures. Since the early 1980s, the regional dispersion of wages, housing prices, and the general cost-of-living indexes has been on the rise. Browne (1989) provides evidence that regional disparities in per capita income have been widening, while Eberts (1989) finds an increase in regional wage dispersion. In addition, we demonstrate below that housing costs and regional price indexes have been following a similar pattern. Curiously, however, wages adjusted for regional cost-of-living differences