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

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IZA Seminar

Place: Zoom

Date: 23.11.2021, 17:30 - 18:45

   

Presentation by 

Enrico Moretti (University of California, Berkeley)
   

Abstract:

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https://us02web.zoom.us/j/87487213161

Meeting ID: 874 8721 3161







There are large differences in mean income across US cities, but little is known about the
levels of standard of living in each city|de ned as the amount of market-based consumption
that residents are able to afford. In this paper we provide estimates of 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 all debit and credit card
transactions, check and ACH payments, and cash withdraws 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-speciffic 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 expensive commuting zone enjoy a level of consumption that
is about half that of low income residents in the most a ordable commuting zone.
In the second part of the analysis, we endogenize income and estimate the standard of
living that low-skill and high-skill households can expect in each US commuting zone, once
we account for geographical variation both in cost of living and also in expected income. We
nd 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. For high school graduates and high school drop
outs we find a signifficant negative relationship between consumption and cost of living, 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 23.5% decline in consumption.

   
   
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