Education’s Role in the Metro-Nonmetro Earnings
Divide
Nonmetro workers, especially
the most highly educated, continue to earn less
than similar workers in metro areas, but lower earnings
may be offset by lower costs of living and the value
of rural amenities.
Lorin Kusmin,
Robert Gibbs,
and Timothy
Parker
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Average
earnings are lower in nonmetro areas
than in metro areas, even after accounting
for
differences in the individual characteristics
of nonmetro earners.
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The
nonmetro-metro earnings gap is greater
for workers with more education and
more experience. |
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For
nonmetro households, lower earnings
may be offset by factors difficult to
measure, such as lower living costs
or the value of rural amenities. |
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This
article is drawn from . . . |
ERS
Briefing Room on Rural Labor and Education.
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You
may also be interested in . . . |
Low-Skill
Employment and the Changing Economy of Rural
America, by Robert Gibbs, Lorin Kusmin,
and John Cromartie, ERR-10, USDA, Economic
Research Service, October 2005.
“Education
as a Rural Development Strategy,”
by Robert Gibbs, in Amber Waves,
Vol. 3, Issue 5, November 2005, USDA, Economic
Research Service.
Wage
Premiums for On-the-Job Computer Use: A Metro
and Nonmetro Analysis, by Lorin D.
Kusmin, RDRR-95, USDA, Economic Research Service,
December 2002.
County-level education
data. |
The pay gap between metro and nonmetro
workers is one of the most persistent features of
the nonmetro economy. In 2006, nonmetro wage and
salary workers, at $602 per week, earned 23 percent
less, on average, than metro workers, at $783 per
week. Lower nonmetro earnings contribute to lower
household incomes and higher poverty rates in nonmetro
areas.
A variety of factors explains
the differences between nonmetro and metro earnings.
First of all, metro-nonmetro differences can exist
because of differences in the characteristics of
workers or because of differences in how those characteristics
are rewarded in nonmetro vs. metro areas. Second,
differences in the cost of living between nonmetro
and metro areas can also influence the earnings
gap. Nonmetro workers may be willing to accept lower
earnings than they might otherwise receive in metro
areas because they have lower expenses for housing,
food, and other essentials. However, there is no
easy way to quantify cost-of-living differences
and so there is a wide dispersion in estimates of
the differences. In any case, it appears unlikely
that cost-of-living differences can fully explain
the large nonmetro-metro earnings gaps faced by
the most educated and skilled workers. Third, differences
in cultural, natural, and other amenities may also
influence wage differences, as workers may accept
lower wages in order to live and work in more desirable
locations. But, again, the relative value of urban
and rural amenities is not easily quantified.
Using data from the Census Bureau’s
Current Population Survey, ERS researchers examined
the first set of factors explaining the earnings
gap—differences in the characteristics of
metro and nonmetro workers and the ways those characteristics
are rewarded in the labor market. The analysis focuses
on differences in total weekly earnings, rather
than just wage rates, because differences in earnings
may also result from differences in the number of
hours worked.
Underlying the earnings gap is
a nonmetro economy with a disproportionate share
of employment in less-skilled jobs, using a Department
of Labor description of job skill requirements.
Historically, the farm-based jobs that supported
nonmetro areas gave way to low-skill jobs in manufacturing
and services, which drew upon the relatively abundant
supply of nonmetro workers with limited education.
Over time, nonmetro skill levels have risen closer
to the national average, but remain below that average.
Nonmetro jobs tend to pay less
than jobs in the same occupation in metro areas,
especially in those occupations requiring high skill
levels. Lower educational attainment and lower rewards
to higher education in nonmetro areas are among
the key factors explaining the earnings gap. A college
graduate in a nonmetro area typically earns less
than in a metro area, after adjusting for other
personal and job characteristics. Thus, nonmetro
areas are doubly disadvantaged by the earnings gap
facing their most educated workers: those workers
have a strong incentive to move to metro areas,
and those who remain are paid less.
Education Is a Major Source
of the Nonmetro Pay Gap
The most obvious worker characteristics
that contribute to higher wages are those that enhance
a worker’s value to an employer because they
indicate greater human capital and, hence, enable
a worker to be more productive. Years of schooling
or work experience are common indicators of human
capital.
Despite large gains in recent
decades, the educational attainment of nonmetro
workers is lower than that of metro residents. The
remaining difference in high school completion is
small: about 11 percent of nonmetro workers lacked
a high school diploma in 2006, compared with 10
percent of metro workers. The disparity widens for
college education, with 20 percent of workers in
nonmetro areas having a degree versus 33 percent
in metro areas.
Further, the nationwide pay gap
between those who have completed a 4-year college
degree or more and those who have not attended college
has widened in recent years. Nationally, in 2006,
college graduates earned about 52 percent more and
graduates with advanced degrees, 93 percent more
than similar high school graduates without college
experience. High school graduates in turn earned
about 19 percent more than those without a high
school degree. This nationwide trend in the job
market has increased the importance of the education
differences in explaining the metro-nonmetro pay
gap.
Assuming returns to educational
attainment remain constant, if educational attainment
in nonmetro areas were the same as in metro areas,
nonmetro earnings would be more than 5 percentage
points ($31 per week) higher, closing about one-fourth
of the metro-nonmetro earnings gap.
Other Characteristics
Have Mixed Effects on the Earnings Gap
Some worker characteristics, particularly
racial and ethnic makeup, reduce the metro-nonmetro
earnings gap. Even after taking other differences
into account, Blacks and Hispanics in the U.S. earn
about 13 percent less on average than non-Hispanic
Whites, and these minority groups make up a smaller
share of the nonmetro workforce than the metro workforce.
Likewise, workers who have difficulty speaking English
or who are noncitizens—both groups whose incomes
are lower than those of otherwise comparable earners—are
disproportionately metropolitan.
A small portion of the earnings
gap is due to the concentration of nonmetro residents
in lower earning regions. Nonmetro residents are
more likely to reside in the low-wage South and
Midwest than metro residents.
The nonmetro economy has a large
share of jobs that require limited skills or training—and
relatively fewer jobs in the financial and professional
business service industries and in managerial and
professional occupations. While worker characteristics
explain much of the lower nonmetro earnings, the
demand of nonmetro employers is largely consistent
with these lower skill sets. Overall, industries
and occupations that require more skill pay more,
although other factors, such as difficult working
conditions or a low degree of competition in the
industry, can also affect pay.
Similar Characteristics,
But Lower Earnings
Differences in worker characteristics
such as educational attainment and race/ethnicity
account for only about one-sixth of the nonmetro
earnings disadvantage. The remainder of the gap
occurs because the earnings of workers with similar
characteristics also vary between metro and nonmetro
areas. For most workers, this gap implies lower
expected pay in a nonmetro area, but the size of
the differential for nonmetro residence varies considerably
by worker characteristics.
Part of the metro-nonmetro wage
gap may be explained by a lower cost of living in
nonmetro areas, which allows nonmetro employers
to attract and retain workers while offering lower
wages than are offered in metro areas. However,
cost- of-living differences are unlikely to explain
the entire wage gap (see box, “Cost-of-Living
Differences”), and cannot explain why
the gap faced by more skilled and educated workers
is disproportionately large.
For example, a high school graduate
with the same personal characteristics as an average
U.S. earner will be paid 13 percent less in nonmetro
areas, but the gap widens to 23 percent for a comparable
college graduate. The nonmetro penalty for a typical
advanced-degree holder is 25 percent. Thus, while
college graduates in metro areas earn 56 percent
more than their metro counterparts with no more
than a high school degree, the premium for a college
degree in nonmetro areas is only 37 percent.
If nonmetro workers had the same
levels of education as metro workers, and also had
similar returns on higher education, nonmetro earnings
would have been 11 percent higher than they were
in 2006.
The dual educational disadvantage
of nonmetro areas is unlikely to be coincidence.
The lower demand for highly educated workers among
nonmetro employers is reflected in the lower wage
premium that nonmetro college graduates command.
The lower premium, in turn, may both dampen motivation
for rural high school graduates to attend college
and increase the net migration of college graduates
out of nonmetro areas.
Though critical, education levels
are not the sole factor associated with variations
in the size of the gap between nonmetro and metro
earnings. In general, the earnings gap is larger
for women, whether married or single, than men.
Workers who are part-time by choice also face a
larger earnings disadvantage in nonmetro areas.
The nonmetro earnings gap is also greater for more
experienced workers, who benefit less from experience
than metro workers. On the other hand, the earnings
gap faced by noncitizens compared with native-born
U.S. citizens with similar personal characteristics
is only about half as great in nonmetro areas as
in metro areas; the data indicate that some noncitizens
with relatively low levels of education and experience
may earn more in nonmetro areas than they would
in metro areas.
Productivity Differences
Lead to Lower Skill Demand in Nonmetro Areas
The relatively low earnings of
nonmetro college graduates partly reflect lower
productivity that leads to lower demand for their
skills and knowledge among nonmetro employers compared
with metro employers. Urban centers more often provide
complementary productive factors, such as efficient
transportation and communications systems, and access
to capital and consumer markets, that draw and retain
high-skill firms. Moreover, well-educated workers
tend to be more productive as individuals when employed
in labor markets with large numbers of similar workers.
These productivity advantages drive up earnings
for metro college graduates, indicated by their
larger returns to higher education.
The disparity in metro and nonmetro
labor demand is apparent in the greater share of
low-skill jobs in nonmetro areas, and in the greater
earnings gap for high-skill jobs. The relatively
lower concentration of nonmetro workers in the financial,
professional service, and business service industries,
and in managerial and professional occupations,
is associated with lower earnings in nonmetro areas
than in metro areas. Further, the earnings premium
for working in professional and managerial occupations
is 6 to 8 percentage points lower in nonmetro areas
than it is in metro areas, even after metro-nonmetro
differences in educational attainment premiums are
taken into account. Similarly, the metro-nonmetro
earnings gap is high in the information industries,
which are concentrated in metro areas to take advantage
of their productivity-enhancing features.
In contrast, workers in production
and transportation occupations face a smaller nonmetro
earnings gap than workers in other occupations.
A smaller-than-average metro-nonmetro earnings gap
is also found for workers in mining, education,
health, transportation, and the utilities industries.
Are Regional Earnings
Differences Important?
The South historically has been
the region with the lowest average earnings because
of the concentration of low-skill, labor-intensive
jobs in agriculture and routine manufacturing, and
the relative lack of integration with the national
economy. In today’s economy, however, nonmetro
Southern earnings have risen relative to those in
other regions and are similar to those in the Midwest.
Lower educational attainment and a greater concentration
of minorities in the South are largely offset by
greater returns to higher education in the South
and a greater concentration of voluntary part-time
workers in the Midwest.
While the data indicate that,
on average, a worker with a low or moderate level
of educational attainment and a given demographic
profile will earn about the same in the South as
in the Midwest, these regions are still at a disadvantage
relative to the Northeast and West. However, there
is a greater premium for college completion in the
South, so workers with a college or advanced degree
earn significantly more than comparable workers
in the Midwest.
Shrinking the Earnings
Gap: What Are the Options?
Education’s dual role in
explaining the earnings gap suggests that policies
to narrow the gap might seek to raise educational
attainment in nonmetro areas, to raise nonmetro
returns to education, or both. Improving local schools
may help nonmetro areas to retain and attract education-oriented
young people with families; this is likely to raise
nonmetro educational attainment levels. Places with
good schools may also be more appealing to migrants
who bring creative and entrepreneurial skills—and
presumably higher earnings—into the community.
In addition, better schools may benefit rural youth
by improving their preparation for either the labor
market or further schooling, in either case raising
their expected earnings. Firms that employ high-skill,
highly paid employees may also be more likely to
locate in areas with a better-educated workforce.
However, efforts to raise local education levels,
including encouraging young people to attend college,
may be blunted by the outmigration of many of those
who do earn a college degree.
Lower nonmetro earnings mean that
a larger share of the rural workforce comprises
the working poor and near-poor, who may qualify
for public assistance. Therefore, either as an alternative
or an adjunct to policies targeted to higher skill
jobs and workers, addressing the most acute needs
of low-skill, low-wage nonmetro workers could be
an appropriate approach to closing the earnings
gap. A number of Federal and State efforts—including
minimum wage standards, tax remittances such as
the Earned Income Tax Credit, and adult training
and certification programs—affect the earnings
of these workers.
Wages
and Salaries or Total Compensation?
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For the analysis discussed in this article,
ERS used wage and salary earnings from the
Current Population Survey (CPS) as a measure
of workers’ remuneration in the labor
market. Yet most wage-and-salary workers
in the U.S. also receive compensation in
the form of employer payments for pension
and insurance funds, and for government
programs like Social Security. Total compensation—the
sum of wages, salaries, and employer disbursements
and contributions—provides a more
complete measure of workers’ remuneration
than do earnings alone. The CPS data do
not include employer contributions, but
recently available information from the
Bureau of Economic Analysis (BEA) does.
The total BEA compensation measure shows
a more pronounced metro-nonmetro gap than
do wage and salary earnings. In 2005, average
total compensation per job stood at $36,758
in nonmetro areas, 29 percent less than
the $51,887 average in metro areas. The
earnings-per-job gap reported by BEA (which
uses a different methodology for estimating
earnings than that used for the CPS) was
slightly smaller, 27 percent, and the nonearnings
gap was 34 percent. Moreover, the share
of nonwage compensation in total nonmetro
compensation is growing. Between 1998 and
2005, nonwage compensation, such as employer
contributions for health care and retirement
benefits, grew from 17 to 21 percent of
total compensation in nonmetro areas.
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Cost-of-Living
Differences
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Metro-nonmetro earnings differences may
be explained in large part by a lower cost
of living in nonmetro areas, which allows
nonmetro employers to attract and retain
workers while offering lower wages than
are offered in metro areas. In particular,
housing costs are likely to be less in nonmetro
areas, where land costs are lower. Costs
are also likely to be lower for other land-intensive
goods and services.
On the other hand, the dispersion of population
and jobs in nonmetro areas is expected to
lead to higher transportation costs for
nonmetro residents. Costs may also be higher
for other goods and services for which transportation
services are an important input.
Because there are no comprehensive statistical
measures of regional or local costs of living,
it is difficult to assess the magnitude
of the differences. Two studies by ERS staff
in recent years used available data to estimate
regional and metro-nonmetro variation in
living costs. Both focused on lower income
populations who must devote a larger share
of income to housing. As a result, the studies
may overstate the magnitude of the differences
in cost of living faced by other populations.
One study used available estimates of
metro and nonmetro cost of living by State
to explore how regional cost-of-living adjustments
would affect poverty counts. This analysis
used area cost-of-living estimates based
on the cost of rental housing. Two key assumptions
are that nonhousing living costs and the
quality of rental housing are the same in
metro and nonmetro areas. In 2001, the estimated
average cost of living in nonmetro areas
was 21 percent lower than in metro areas.
A second approach relied on survey data
on household food security. The key assumption
was that households with similar characteristics
and levels of food insecurity are likely
to have similar levels of real income whether
they are located in metro or nonmetro areas.
After controlling for race, ethnicity, and
household structure, this approach estimated
that the cost of living is 16 percent lower
in nonmetro than in metro areas.
For additional readings on the cost-of-living
subject you may be interested in . .
The
Cost of Living and the Geographic Distribution
of Poverty, by Dean Jolliffe, ERR-26,
USDA, Economic Research Service, September
2006.
“Does It Cost Less to Live in Rural
Areas? Evidence from New Data on Food
Security and Hunger,” by Mark Nord,
in Rural Sociology 65(1). 2000,
pp. 104-125.
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