Returns vs. Endowments in the Earnings Attainment Process for Metropolitan and Nonmetropolitan Men and Women 1

Abstract Three explanations typically are offered for differences in earnings: (1) individuals have different levels of human capital and hold different jobs (endowments differ), (2) rewards to human capital and job characteristics differ (returns differ), and (3) some combination of differences in endowments and returns explain variations in earnings. We argue that the structure of labor markets in nonmetropolitan (nonmetro) areas differs from that in metropolitan (metro) areas such that returns, as well as endowments, vary. These variations in returns favor metropolitan workers, explaining the predominant portion of the metro/nonmetro earnings gap. We examine the earnings differences for metro and nonmetro men and women in both 1977 and 1987, showing that returns outweigh endowments in explaining that gap for both men and women, although their importance decreases over the ten‐year period. Research to improve our understanding of how differences in labor market structure produce differential returns has begun and may yield yet another avenue for action for policymakers interested in reducing metro/nonmetro inequalities.