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While the concept of multiple factor price cones is usually applied across countries, it is substantially more controversial when considering regions within a relatively flexible economy such as the US. It is easy to imagine that the relative similarity of endowments, regulations and markets combined with the mobility of capital, technology, and even labor within the US would make it likely that relative price differences are at best transitory. In that scenario, the regions of the US would occupy a single factor price cone. However, work in the convergence of regional incomes within the US finds slow movements of relative per worker income levels, suggesting that either factor endowments or relative factor prices are at best converging slowly.
An important question in pursuing research of this nature is why or whether migration effectively integrates the various US labor markets. Topel (1986) provides a dynamic model and evidence for the effects of local demand conditions on wage levels and the inducement to migration. He argues that higher income workers are more mobile and move in response to local demand shocks of sustained duration. In contrast, lower income workers are largely constrained from moving and see substantial movements in their wages. The existence of increasing marginal costs of out-migration allows for persistence differences in relative wages. In Topel’s framework, demand shocks are region-specific but of undefined origin. In this paper, we argue that the existence of multiple relative factor price cones within the US is at least partly responsible for the heterogeneity in industry composition. Variations in industry location due to factor price differences provide a source of heterogenous local demand shocks.

Developing an understanding of both the current and past structure of relative wages across US regions is important for a variety of mainstream research questions. Most obvious is the relevance for the literature on wage inequality itself. Much of the literature from both the labor and international trade perspectives has assumed that wage inequality varies across and within socioeconomic groups and industries but not across regions. Recently this assumption of regional homogeneity has been the subject of research. Focusing on the heterogeneity of relative wage movements at the regional level, Lee (1999) and Bernard and Jensen (2000a) both find substantial variation in wage inequality movements and levels across US states. We provide a direct test of the similarity of relative factor prices across regions and over time.