Michael K. Lettau (1994) "Wage Adjustment in Local Labor Markets: Do the Wage Rates in All Industries Adjust?"
Previous research finds that an increase in a local area's labor demand increases the area's total employment and average wage rate relative to U.S. total employment and the U.S. average wage rate. This paper extends previous research by exploring heterogeneity within an area's labor market. I combine data from County Business Patterns with data from the Current Population Survey to estimate employment and average hourly earnings for 166 U.S metropolitan areas, disaggregated by 37 industries. I test whether an increase in an area's overall labor demand increases the wage rate of an industry with constant labor demand located in the area. And, if so, does employment for the industry in the area decrease? The empirical findings are summarized as follows. The average hourly earnings of an industry with constant labor demand increases with an increase in labor demand among other industries located in the same area. However, the average hourly earnings of all industries in an area do not increase uniformly with an increase in the area's overall labor demand. The magnitude of the increase in an industry's average hourly earnings in an area, given an increase in labor demand for another industry located in the same area, depends on the similarity of the two industries' distribution of occupations. Even though the average hourly earnings of an industry with constant labor demand increases with an increase in the area's overall labor demand, employment for the industry only slightly decreases or actually increases. Under the structure of a model in which all industries compete for an area's pool of workers, this suggests that an area's labor demand is quite inelastic.
Last Modified Date: July 19, 2008