Nominal and Real Wage Differences

In this section, I estimate how much of the increase in nominal wage differences
between college graduates and high school graduates is accounted for by differences
in the cost of living. In particular, in Section IA, I show estimates of the college premium
in nominal and real terms. In Section IB, I discuss whether my estimates are
biased by the presence of unobserved worker characteristics or unobserved housing
characteristics. In Section IC, I show estimates of the college premium in real terms

Nominal and Real Conditional Wage Difference between Workers with a High School
Degree and Workers with College or More, by Year–Baseline Estimates
1980 1990 2000
increase 1980 1990 2000
(1) (2) (3) (4) (5) (6) (7) (8)
Model 1
Nominal wage difference 0.40 0.53 0.60 0.20 0.35 0.47 0.53 0.18
(0.011) (0.012) (0.013) (0.007) (0.006) (0.007)
Model 2
Real Wage Difference — 0.38 0.48 0.53 0.15 0.37 0.46 0.52 0.15
Local CPI 1 (0.010) (0.008) (0.008) (0.008) (0.006) (0.007) Percent of nominal 25% 17%
increase accounted
for by cost of living
Model 3
Real Wage Difference — 0.37 0.45 0.51 0.14 0.37 0.46 0.51 0.14
Local CPI 2 (0.009) (0.008) (0.008) (0.008) (0.006) (0.007) Percent of nominal 30% 22%
increase accounted
for by cost of living
MSA Fixed Effects No No No Yes Yes Yes
Notes: Standard errors clustered by metropolitan area in parentheses. The dependent variable in Model 1 is the log
of nominal hourly wage. The dependent variable in Model 2 is the log of real hourly wage, where real hourly wage
is the ratio of nominal wage and Local CPI 1. The dependent variable in Model 3 is the log of real hourly wage.


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