Hanson and Slaughter (1999), on the other hand, find that US state factor supply changes are largely absorbed by changes in production technique that are common across states, an outcome they argue is consistent with productivity-adjusted factor price equality. In this paper we suggest that regional variation in relative factor prices is an important, unexplored component of how the US adjusts to both changes in factor supplies and the pressures of international trade.
Finally, our investigation of regional factor price equalization complements existing research in economic geography. That body of work, nicely surveyed by Hanson (2000), focuses on the agglomeration of economic activity and its effect on the spatial variation of wages, employment and production. Our approach is most closely related to that of Kim (1995, 1999), who finds that long-run trends US regional industry specialization are consistent with regional comparative advantage. Our emphasis in this paper on skilled-to-unskilled wage disparity, as well as the overlap of industries across regions, however, is unique.
The rest of the paper is organized as follows: section 2 outlines the implications of the multiple cone Heckscher-Ohlin equilibrium and summarizes the extent of regional variation in the United States. Section 3 details the relevant theorems on factor price equality and develops the testable implications. In Section 4, we discuss possible problems with existing techniques to test for relative factor price equality and outline our empirical methodology. Section 5 presents the results from the empirical tests of relative factor price equality for 1972 and 1992 and offers additional evidence on the relation between industry structure and factor prices. We look for variation in industry mix across factor price cones in Section 6. Section 7 concludes.