Stone Inequality & Social Policy Seminar: Rebecca Diamond

Date: 

Monday, October 24, 2022, 12:00pm to 1:15pm

Location: 

Allison Dining Room

Where is Standard of Living the Highest? Local Prices and the Geography of Consumption

Rebecca Diamond, Professor of Economics, Stanford Graduate School of Business

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 market-based consumption that residents are able to afford. In this paper we provide estimates of the standard of living by commuting zone for households in a given income or education group, 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 commuting zone and income group. To measure local prices, we build income-specific consumer price indices by commuting zone. We uncover vast geographical differences in material standard of living for a given income level. 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. We then endogenize income and estimate the standard of living that low-skill and high-skill households can expect in each US commuting zone, 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 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.

Rebecca Diamond is
the Class of 1988 Professor of Economics at Stanford Graduate School of Business where she teaches Data and Decisions. She is an applied micro economist studying local labor and housing markets. Her recent research focuses on the causes and consequences of diverging economic growth across U.S. cities and its effects on inequality. Her current research studies the causes and consequence of segregation of households by income and education level across neighborhoods and labor markets. She was a Postdoctoral Fellow at the Stanford Institute for Economic Policy Research from 2013 to 2014. She received her PhD in Economics from Harvard University in 2013 and her BS in Physics and Economics and Mathematics from Yale University in 2007.

Click here to read the paper.