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Differentials in Nominal Wages and Prices Between Cities

It is well known that great variations in money wages and prices can exist within a country even where these differentials are widely known and there is no legal barrier to mobility. This article investigates the possibility that the differential availability or quality of environmental goods (e.g. climate, clean air, public services) may be an explanatory variable. A model of a two-commodity world containing environmental and non-environmental goods is constructed, with samples from SMSAs being used in the estimation of wage and price equations: exogenous variables include population, air pollution, hazard, local services, property tax, climate, median age, net migration and unemployment. The analysis suggests that people are sensitive enough to the availability of environmental goods for this to explain most of the observed variation in wage rates and the price index.

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