The Empirical Results Found in The Literature
Most of the empirical results from the literature attempt to decompose the geographical wage differentials according to human capital characteristics. Areas with more skilled workers will tend to have higher mean wages. Though, average wages may differ among different areas because they offer different levels of amenities. It is usually believed in economics that wages in areas where the level of amenity is high comparatively to other areas will be higher. Empirical research has attempted to measure area characteristics in order to measure this effect on average wages. Though, some characteristics may be attractive for some workers but because workers may have different utilities, other workers may not be attracted by these characteristics. The following assumption is usually made: workers among a similar occupation will share similar utility function, then it is possible to measure the characteristics of areas on the mean wage of a particular occupation.
Read more about this topic: Compensating Differential
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