Economics Asked by Jesper Hybel on December 25, 2020
In standard economic theory wages are simply prices on the labor market determined in equilibrium by the supply and demand of labor. Looking across space within countries it is however standard to find a relative large variation in local wage levels. At the same time labor is often very mobile again within countries.
For the United States of America the U.S. Census reveals that in 1990 four percent of white males age 25 to 34 moved across state lines, with the cumulative effect that almost a third of this group no longer resided in the state in which they were born.
When individuals move the supply of labor changes and one could expect wages to equalize based on the assumption that the migration itself was motivated by the one state offering higher wages than another. Seen in the light of this it can seem a little puzzling that spatial wage differentials nonetheless continue to exist. What are the main explanations offered by economic theory?
There are several explanations for this in the literature (the order does not necessarily reflect importance of each explanation).
I think the above summarizes all the major factors but there might be some further ones as well for that you can see the sources above and ones cited therein.
Correct answer by 1muflon1 on December 25, 2020
I would add two more, and rather primitive, factors in @1muflon1 long list:
Labor input is not perfectly mobile with respect to the wage. We should never forget that the concept of a utility function allows for arbitrary "goods" to be "utility enhancing". It follows that migrating in chase of a better wage does not always prevails when this may mean that the worker will leave behind some intangible utility-enhancing goods, like for example a sense of belonging in a specific place, or a network of friends, kin and extended family.
Information is not complete nor perfect. Even in today's era of information overdose, "demand for labor" is not what the employers demand, but what the workers know that the employers demand. And not all job opportunities are posted on-line.
Answered by Alecos Papadopoulos on December 25, 2020
tl;dr– Even simple homogenous systems don't necessarily equalize across space.
Naively, one might assume that if we have a large unbiased system, its members will tend to form one homogenous community. But that's not the case.
For example, consider a pure substance in a glass jar at its triple point. Then there can be three stable phases: one gas, one liquid, and one solid. There doesn't need to be an external bias or forced separation to maintain this; it's often just favored over a single homogenous phase.
Likewise, have you seen oil and water separate after being mixed? Actually, both phases tend to have both water and oil, just in different ratios. Just one phase tends to have a high ratio of water-to-oil while the other has a high ratio of oil-to-water. So it's not a full separation nor single ratio, but rather two different ratios coexisting.
Other answers have made good points about how biases can prevent everything from equalizing out across space. The point here is just that we wouldn't tend to expect everything to equalize out across space even if there weren't biases.
Answered by Nat on December 25, 2020
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