Does the size of the paycheck alone determine the lifestyle you can afford? A recent Regional Economist article examined how regional differences in cost of living affect living standards within the Eighth Federal Reserve District.Headquartered in St. Louis, the Eighth District includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.
Economist Yi Wen and Research Associate Brian Reinbold looked at income inequality through the lens of cost of living.
They pointed out that housing prices vary immensely across the country and by the type of area (urban, suburban and rural). Since housing consumes a large share of income, someone with a high income may not necessarily have a high standard of living if housing is very expensive, they noted.
“In other words, the purchasing power of a dollar is not the same across regions due to variations in the cost of living,” the authors wrote. “Therefore, factoring in cost of living can yield fruitful insights about true inequality.”
Adjusting income by the U.S. consumer price index (CPI) or the personal consumption expenditures price index (PCEPI) are common ways to adjust nominal income to account for cost of living.
However, the authors noted that these national indexes don’t explain much about cost of living among different regions.
For example, take the average per capita income for counties in the Eighth District. Adjusting this income by the 2015 PCEPI results in an adjusted income of about $31,000. The U.S. average, on the other hand, is $43,996.See Coughlin, Cletus; Gascon, Charles; and Kliesen, Kevin. “Living Standards in St. Louis and the Eighth Federal Reserve District: Let’s Get Real." Federal Reserve Bank of St. Louis Review, 2017, Vol. 99, No. 4, pp. 377-394.
However, the results are different when using a price index that provides data on a regional level, according to the authors.
As shown by their analysis, “the living standard in the District is much closer to the national average than suggested by per capita income per se,” they wrote.
The Bureau of Economic Analysis (BEA) offers regional price parity indexes (RPPs) to facilitate the measurement of living standards across regions. The RPPs are available for states, metropolitan statistical areas (MSAs) and nonmetropolitan areas. RPPs for 2015 are the most recent data.
The District’s average RPP was 86.6, and the median RPP was 85.6, suggesting that the cost of living in the district was about 15 percent below the national average, they noted.
However, the RPPs can vary widely across the District.
“Also, nonmetropolitan, or more rural, areas tend to have lower RPPs and thus a lower cost of living,” they wrote.
Wen and Reinbold then looked at county-level income and adjusted it for cost of living. Since the BEA doesn’t provide county-level RPPs, the authors adjusted county-level income in the following manner:
Using this method, the authors found that the average RPP-adjusted per capita income was $36,482 for the District’s counties, compared with $43,996 for the U.S.
This gap between the District and U.S. averages shrank from about $13,000 in PCEPI-adjusted terms to just $7,500, they noted.
“Namely, due to the District’s low cost of living, we see the gap narrow between the District’s ‘income’ and the nation’s,” the authors wrote.
They noted that the results are similar to what St. Louis Fed President James Bullard has demonstrated about the importance of adjusting income for cost of living across MSAs in the U.S.
However, inequality remains in the District, as seen in the table below.
|Adjusted Real Per Capita Income by County: Top Five and Bottom Five|
|Rank||County||State||Regional Price Parity Index, 2015||RPP-Adjusted Per Capita Personal Income*|
|* Chained 2009 dollars|
|SOURCES: Bureau of Economic Analysis, Haver Analytics and authors' calculations.|
|Federal Reserve Bank of St. Louis|
The District’s “richest” county (Benton in Arkansas) commands a living standard more than 300 percent of that in the “poorest” county (Douglas in Missouri), the authors found.
“Still, despite these outliers, the living standard is relatively consistent across most counties in the District,” they observed.
By adjusting income for cost of living, the authors found that overall inequality is not so severe in the District—both across counties and in comparison with the nation—and that living standards tend to be higher within MSAs than outside them.
“In general, inequality is less severe when measured by living standards than by income per se,” they authors concluded. “Still, finer micro-data is necessary to better understand heterogeneity within each county.”
1 Headquartered in St. Louis, the Eighth District includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.
2 See Coughlin, Cletus; Gascon, Charles; and Kliesen, Kevin. “Living Standards in St. Louis and the Eighth Federal Reserve District: Let’s Get Real.” Federal Reserve Bank of St. Louis Review, 2017, Vol. 99, No. 4, pp. 377-394.