Why Should Wages Be the Same/Different Across the Country?
Economic theory suggests that when goods or services are freely traded or workers are mobile, real wages would tend to equalize over time. For example, firms in labor-intensive industries would move to low-cost areas in search of cheaper labor, reducing the demand for workers in the high-cost area. Alternatively, if workers are mobile, they would move to the higher-wage areas, increasing the supply of workers.
Conversely, different regions offer different amenities that impact one's quality of life. Amenities include, for example, the climate and recreational offerings, such as the number of restaurants or parks.3 In general, real wages are higher in low-amenity places because workers need more income to compensate for the lack of amenities. Likewise, in general, real wages are lower in high-amenity places because the amenities are part of the workers' compensation. This helps to explain why places such as Hawaii, Florida, Arizona, North Carolina, and Colorado, which are all high-sunshine states, tend to have lower real wages for most occupations, including teachers.
Other Factors Specific to Teachers
Unlike firms in other industries, schools are unable to relocate to hire lower-wage teachers, although continued growth of online education has made this a possibility for teaching older students. While schools cannot move, teachers can relocate. However, there are some barriers to migration. Public-teacher pension plans set vesting periods that require teachers to stay for a certain number of years before becoming eligible for their retirement contributions.4 The difficulty in transferring teacher certifications may also limit cross-state mobility of teachers.
Education spending in each state plays an important role in determining teacher wages. In 2016, public elementary and secondary school spending per pupil in New York was $22,000, three times more than the $7,000 per pupil in Arizona.5 There is a strong positive correlation between public funding for education and teachers' wages: A $1,000 difference in a state's education spending per pupil is associated with a $1,162 wage difference.
The difference in teacher quality is another possible explanation for cross-state wage differences. Higher pay attracts more able graduates into the profession. As the supply of teachers increases, entry into the profession becomes more competitive and the quality of teachers rises.6 Also, there is a clear trade-off between student-teacher ratios and teachers' pay: In general, the higher the student-teacher ratio, the higher the pay.7 In fact, the ratio is lower in states such as West Virginia and North Dakota and higher in states such as California and Michigan.8
Another factor in wage differences could be mismeasurement from comparing annual wages instead of total compensation. Wage is only one part of the compensation package. Teaching usually offers additional benefits such as pensions and health insurance. Some states may provide benefits instead of additional wages.
Notes
References
© 2018, Federal Reserve Bank of St. Louis. The views expressed are those of the author(s) and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.
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