Where is Standard of Living the Highest? Local Prices and the Geography of Consumption
Enrico Moretti, Michael R. Peevey and Donald Vial Professor of Economics, UC Berkeley
Abstract: Income differences across US cities are well documented, but little is known about the level of standard of living in each city - defined as the amount of consumption that residents are able to afford. In this paper we provide the first estimates of the standard of living by city for low income and high income households, and we study how they relate to local cost of living. Using a novel dataset, we observe debit and credit card transactions, check and ACH payments, and cash withdrawals of 5% of US households in 2014 and use it to measure mean consumption expenditures by city and income group. We uncover vast geographical differences in material standard of living, especially for low income households. Low-income residents in the most affordable city enjoy a level of consumption that is 74% higher than that of low-income residents in the most expensive city. We then endogenize income and estimate the standard of living that low-skill and high-skill households can expect in each US city, accounting for geographical variation in both costs of living and expected income. We find that for college graduates, there is essentially no relationship between consumption and cost of living, suggesting that college graduates living in cities with high costs of living - including the most expensive coastal cities - enjoy a standard of living on average similar to college graduates with the same observable characteristics living in cities with low cost of living - including the least expensive Rust Belt cities. By contrast, we find a significant negative relationship between consumption and cost of living for high school graduates and high school drop-outs, indicating that expensive cities offer a lower standard of living than more affordable cities. The differences are quantitatively large: High school drop-outs moving from the most to the least affordable commuting zone would experience a 26.9% decline in consumption.
Enrico Moretti is the Michael R. Peevey and Donald Vial Professor of Economics at the University of California, Berkeley. He serves as the Editor in Chief of the Journal of Economic Perspectives and is a Visiting Scholar at the Federal Reserve Bank of San Francisco. He is also Research Associate at the National Bureau of Economic Research (Cambridge), Research Fellow at the Centre for Economic Policy Research (London) and the Institute for the Study of Labor (Bonn).
Professor Moretti’s research covers the fields of labor economics and urban economics. He has received several awards and honors, including the Society of Labor Economists’ Rosen Prize for outstanding contributions to labor economics, the Carlo Alberto Medal, the IZA Young Labor Economist Award and a Fulbright Fellowship. His book, The New Geography of Jobs, has been translated in eight languages and was awarded the William Bowen Prize.