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Why Are State and National Wages Different?
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  1. Why Are State and National Wages Different?

  2. Why do wage differences occur? • What explains differences in the average wage between a given state and the U.S.? • Industry mix? • Overall wage rates across industries?

  3. Differences in wages • The difference between a state’s average wage and U.S. average wage can be decomposed into the Industry Mix Effect and the Level Effect.

  4. Differences in Average wage • The Industry Mix Effect gets at the impact of the state’s industry mix on the average wage. • States with an industry mix tilted towards high-wage industries will enjoy a higher overall wage.

  5. Differences in Average wage • The Level Effect examines the magnitude of a state’s average wage industry-by-industry relative to the U.S. • Given the industry mix, a state with higher wage industry-by-industry will enjoy higher overall average wage.

  6. Differences in Average wage State Wage - U.S. Wage = Industry Mix Effect + Level Effect.

  7. Differences in Average wage • Example: Tennessee average wage compared with the U.S. 2010: • Tennessee: $41,760 • United States: $46,455 • Difference: -$4,695 • Question: how much of the difference is due to the Mix Effect and how much to the Level Effect? • Data: private sector QCEW series.

  8. Determining the Industry Mix Effect • The Industry Mix Effect is the portion of the state-U.S. wage difference that can be explained by the state’s particular employment distribution across industries. • Example: a state with above average employment in a nationally high-wage industry will raise its average wage.

  9. Determining the Industry Mix Effect • Questions: • What is a nationally high-wage industry? • What is an industry with above average employment?

  10. Determining the Industry Mix Effect • We can define a high-wageindustry as having a wage higher than the national average wage. • Define the Wage Margin = Industry Wage – Total Wage (both for the U.S.).

  11. Determining the Industry Mix Effect • High-wage and low-wage industries for the U.S.

  12. Determining the Industry Mix Effect • What is an industry with above average employment? • These industries for a state have a higher employment share compared with the national average. • Definition: • Employment share difference = state share of employment – U.S. share.

  13. Determining the Industry Mix Effect • Determining industries with above and below average employment for Tennessee

  14. Determining the Industry Mix Effect • To calculate the industry mix effect, multiply the Wage Margin by the Employment Share Difference, then add up.

  15. Determining the Industry Mix Effect

  16. Determining the Industry Mix Effect • The industry mix effect for Tennessee equals -$242. • This means that Tennessee’s average wage is $242 lower than the U.S. average wage because of the state’s particular mix of industries.

  17. Determining the Level Effect • The Level Effect measures the portion of the state-U.S. wage difference that is due to higher or lower wages industry-by-industry. • Given the mix of industries, a state with higher wages industry-by-industry will enjoy a higher overall average wage.

  18. Determining the Level Effect • The Level Effect is the weighted average of state-national wage differences industry-by-industry, using the state industry share as weights. • Definition: • Wage difference = state wage by industry – U.S. wage by industry.

  19. Determining the Level Effect

  20. Determining the Industry Mix Effect • The Level Effect for Tennessee equals -$4,452. • This means that Tennessee’s average wage is $4,452 smaller than the U.S. because of lower wages by industry, holding industry mix constant.

  21. Differences in Average wage • Tennessee average wage compared with the U.S. 2010: • Tennessee: $41,760 • United States: $46,455 • Difference: -$4,695 • Difference due to industry mix: -$242 • Difference due to wage level: -$4,452.

  22. Differences in Average wage • Suppose a state wishes to target scarce resources for a policy that will move the state closer to the U.S. average wage.

  23. Closing Wage Differences Which policy (in Tennessee’s case) is more supported by the facts? • Recruit and/or develop more businesses in higher-wage industries. • Institute policies (education, training, R&D) that result in higher productivity and higher wages across the board (over a broad set of industries).

  24. Appendix: Alaska • Alaska average pay 2010: $47,171 • U.S. average pay 2010: $46,455 • Difference: + $716 • What explains the positive difference?

  25. Appendix: Alaska • Alaska average pay 2010: $47,171 • U.S. average pay 2010: $46,455 • Difference: + $716 • What explains the positive difference?

  26. Appendix: Alaska

  27. Appendix: Alaska

  28. Differences in Average wage • Alaska average wage compared with the U.S. 2010: • Alaska: $47,171 • United States: $46,455 • Difference: + $716 • Difference due to industry mix effect: -$1,855 • Difference due to level effect: +$2,577

  29. Differences in Average wage • Are wages higher because Alaska is more productive, or because of a higher cost of living? • Can Alaska gain by tweaking the industry mix?