Connecting state and local government leaders
A new working paper finds that geographical differences in the standard of living are economically large.
Income differences across U.S. cities are well documented, however, little is known about the standard of living levels in each city. A working paper by two college professors for the National Bureau of Economic Research finds, among other things, that geographical differences in the standard of living for a given nominal income level are economically large.
The authors define standard of living as the amount of market-based consumption that residents can afford, and note that during the last three decades, there has been a significant increase in income differences.
Economically thriving cities, like New York, San Francisco, Boston and Seattle, have experienced rapid growth in mean household income. However, residents of less dynamic local labor markets have experienced fewer increases in income, and their incomes have even declined in some cases, the paper shows.
To investigate consumption differences across the country, professors Rebecca Diamond, of Stanford University, and Enrico Moretti, of the University of California, Berkeley, mapped consumption expenditures in each commuting zone, which are geographic units intended to more closely reflect the local economy where people live and work, for each income group. The three commuting zones they studied with the lowest consumption of low-income households are San Jose, California, San Francisco and San Diego, with consumption levels between 27% and 30% lower than the median commuting zone, the paper says.
Examples of commuting zones with high consumption of low-income households are Huntington, West Virginia; Johnstown, Pennsylvania; and Elizabeth City, North Carolina. They have consumption levels 22% to 23% higher than the median commuting zone.
The paper has two main conclusions:
- First, it uncovers extended geographical differences in material standard of living for a given level of income. Low-income residents in the most-affordable commuting zone enjoy a level of consumption that is 74% higher than that of low-income residents in the most-expensive commuting zone.
- Second, the authors found marked differences between low- and high-skill households. For high-skill households, there was no relationship between expected consumption and cost of living, suggesting that college graduates living in cities with high costs of living enjoy a standard of living generally like college graduates living in cities with low costs of living.
In the paper, the authors provide estimates of the standard of living by commuting zone for households in each income or education group and studies how they relate to the local cost of living. Using a novel dataset, they observe debit and credit card transactions, check and automatic clearing house payments and cash withdrawals of 5% of households in 2014 and use it to measure mean consumption expenditures by commuting zone and income group.
For more information from the NBER working paper click here.
Andre Claudio is the assistant editor for Route Fifty.