Final answer:
Geographic pay differentials are primarily based on the cost of living, which affects labor markets and the decision-making process for locating new businesses or factories.
Step-by-step explanation:
Geographic pay differentials are most frequently based on the cost of living. This is related to the labor markets and reflects how wages for labor and interest for financial capital are determined by a variety of factors, including the cost of living in a particular area. When companies conduct industrial site location analysis, such as deciding where to locate a new factory, they evaluate the cost of labor, which is significantly linked to the cost of living in the local area. This assessment considers the cost involved in maintaining a certain standard of living, including housing, utilities, food, transportation, healthcare, and other necessities.