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Inequality has been a big issue in the US. Generally when we talk about cost of living, it's adjusted on a per state basis, but this masks a lot of true living conditions. Northern Virginia just outside Washington DC has some of the highest cost of living in the country, yet if we only look at cost of living on a per state basis, people living in Alexandria are lumped in with people living in rural southwest Virginia with a very low cost of living. This map tool gives a sense of how widely cost of living can vary within a state.

I'm looking for a measure of inequality that adjusts each income for the cost of living in which it was earned. For example, based on this calculator someone making 50,000 in Charlotte NC is as well off as someone making $90,031 in Brooklyn, NY. I would like both people to show up as making $50,000 in Charlotte dollars or both show up as $90,000 in NYC dollars. What does income inequality in America look like after this kind of cost of living per county/city adjustment?

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    This would be an interesting Political Economy article, but to my knowledge it doesn't exist. The information you would need exists, but the amount of work far surpasses an SE answer. Basically, you could use data on the income distributions by statistical area, weighted for population and cost of living. My suspicion is that it wouldn't make a lot of difference, however, because the GINI index in the US is driven by very few people whose income far, far outstrips the COLA in any given area. – The Pompitous of Love May 5 '16 at 14:38
  • @ThePompitousofLove I think the inequality between most people and mega-income earners is significant and important. However, I think it's also very important to understand the income distribution of the middle class vs. upper middle class vs. working class, and I think that failing to effectively capture cost of living could definitely make understanding those differences more difficult. – lazarusL May 5 '16 at 15:04
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    All correct. Of course, you'd have to run the actual analysis, but my understanding of what is driving the Gini coefficient in the U.S. is the enormous gap between the super-rich and even the relatively rich. COLA could make a difference, but my gut reaction is that it won't make much of a difference. It would be an interesting analysis, regardless. I hope you do it, or find someone who did. – The Pompitous of Love May 5 '16 at 16:27
  • You might also be interested in looking at income inequality within cities - say, by only comparing incomes that originate from individuals within the same city. – Everyone_Else Jul 25 '16 at 15:21
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The study "Real Wage Inequality" (published in the American Economic Journal: Applied Economics, 5 (1), 2013) by Enrico Moretti (Berkely) could be interesting for you.

Abstract:

A large literature has documented a significant increase in the return to college over the past 30 years. This increase is typically measured using nominal wages. I show that from 1980 to 2000, college graduates have increasingly concentrated in metropolitan areas that are characterized by a high cost of housing. This implies that college graduates are increasingly exposed to a high cost of living and that the relative increase in their real wage may be smaller than the relative increase in their nominal wage. To measure the college premium in real terms, I deflate nominal wages using a new CPI that allows for changes in the cost of housing to vary across metropolitan areas and education groups. I find that half of the documented increase in the return to college between 1980 and 2000 disappears when I use real wages. [...]

Section 3.2 describes how to calculate local CPI using Census data from 1980, 1990 and 2000. I do not know whether the data is available (could find it neither on his site nor on the journal website) but I hope it still helps.

Added by LazarusL:

Some of the key points findings which relate to the question:

Using these two local CPI’s, I find that the level of the college premium is significantly lower in real terms than in nominal terms. For example, in 2000 the conditional difference between the wage of college graduates and of high school graduates is 60% in nominal terms and only 37%-43% in real terms. Second, and most importantly, the increase in the college premium between 1980 and 2000 in real terms is significantly smaller than the increase in nominal terms. Specifically, the increase in nominal terms is 20 percentage points. The increase in real terms is between 8 and 10 percentage points.

The author finds that the previous benefit of going to college in terms of increased wages is much smaller than the nominal wage differences make it appear, since many college graduates live in expensive cities where there incomes do not go as far in real terms.

The author also brings up other issues about whether people concerned with inequality should worry about real (adjusted for cost of living) vs nominal income.

The implications of this empirical finding for disparities in well-being depend on the reasons for the increase in the share of college graduates in expensive cities. I consider two broad classes of explanations. Under a demand pull hypothesis, the relative demand of college graduates increases in expensive cities because of localized skill-biased technical change or other demand shocks. In this case, college graduates move to expensive cities because the jobs for college graduates are increasingly located in those cities, and not because they particularly like living in those cities. The increase in their utility level is smaller than the increase in their nominal wage due to higher cost of living. Under a supply push hypothesis, the relative supply of college graduates increases in expensive cities because college graduates are increasingly attracted by amenities located in those cities. The increase in the cost of living in those cities reflects the attractiveness of the cities to skilled workers and is the price for the consumption of desirable amenities.

Essentially, the author asks, are people going to expensive cities because that's where he jobs are (supply factors), or are the jobs in expensive cities because people want to live there (demand factors). The author finds that:

While I can not completely rule out that supply shocks may play a role, the weight of the evidence seems consistent with the notion that a significant part of the variation in the relative fraction of college graduates across cities is driven by demand factors.

So the empirical evidence he has indicates that jobs are in expensive cites mostly because people want to live in such cities. He does, however, admit that causation is a bit messy and he cannot rule out the possibility of supply factors.

Overall, this study does not give an in depth picture of the data for the entire US population with their incomes adjusted for cost of living, but it does give valuable insights into how cost of living effects inequality.

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    This paper is awesome, thank you for bringing it to my attention. I'm going to summarize some of the key points and bring out more quotes in your answer. Feel free to edit or remove my changes as you see fit. – lazarusL Jul 26 '16 at 17:29
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I was able to find this database from MIT which provides cost of living statistics by state and county. They also break it down by household composition (single, spouses, children) and give a breakdown of the costs by category. So for instance if you want to exclude medical expenses, you could do it. They include incomes by profession as well.

From a cursory examination their data seems about right, possibly a slight underestimation.

There is also a crowdsourced cost of living database which gives a detailed breakdown of data by cities, but if you want to access their entire dataset at once I think you have to buy their API subscription. Looking at individual cities is free.

  • This is definitely relevant data, but what I'm curious about is how these differences in cost of living effect inequality. If we factor in cost of living, are things more or less equal and by how much? – lazarusL Jul 25 '16 at 12:46
  • @lazarusL One further confounding issue is that the market basket of goods and services which drive the cost of living for the affluent is quite different than the market basket for the less affluent, although the predominant source of differences in cost of living within the U.S. is due to housing (which is a small share of the expenses of the very affluent and a big share of the expenses of everyone else). – ohwilleke Jul 20 '17 at 4:05

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