Abstract: What explains persistent regional earnings differences? This paper argues that regional differences in amenities can account for the wage differences; in contrast, cost-of-living variations do not account for wage differences, but actually exacerbate them. This conclusion results from a model in which variations in rents and wages are equalizing differences for amenity differences. Empirical results are consistent with the model. The model also extends previous work by considering two types of workers instead of a homogeneous work force. The wages of one type of worker prove to be dependent on the preferences of the other type. Copyright 1988 by Oxford University Press.