Psychic costs and factor price equalization

Abstract

There has been some perplexity among economists over the failure of interregional wage differentials to approach zero over time in an economy characterized by labor mobility. Johnson [7], and Sjaastad [14] , among others, have hypothesized declining wage differentials among regions and have puzzled over contrary empirical results. It has generally been assumed that labor will flow toward regions paying the highest wage rate. This equilibrating framework has dominated economic thought on this problem area and has directed research along narrow market-oriented lines. The hypothesis of this paper is that nonmarket considerations, specifically psychic costs, are a major force in preventing a market-directed flow of human resources. Moreover, "nonoptimal" allocation of human resources results from differences in workers' perceptions of utility between various regions. We will first review the literature in this area and then present an empirical analysis of demographic characteristics suggesting the magnitude of the psychic factor.