Interregional Wage Transmission in an Urban Hierarchy: Tests Using Vector Autoregressive Models

Abstract

This study applies vector autoregressive modeling techniques to examine a wage transmission hypothesis. The techniques produce a model that quantifies the magnitude and timing of intercity interdependencies in the determination of wage rates. The Granger-Sims notion of causality is used to establish and test the statistical significance of the intercity wage relations. Impulse response functions provide a graphic depiction of the dynamics of the relations determined by the vector autoregressive model. A Granger-causal structure is found that is consistent with the hypothesis of downward wage diffusion through an urban hierarchy of cities. The approach used here holds great promise in many areas of regional science research.