Economics, U.S. Economy

Geography and inequality

Image Credit: Patchwork Nation

Image Credit: Patchwork Nation

In a new paper published in the American Economic Journal: Applied Economics, Enrico Moretti of UC Berkeley finds that much of the increase in income inequality seen in recent decades is offset by changes in the cost of living for rich and poor. In effect, while college graduates have received a rising pay premium over those with only high school educations, college grads are increasingly congregating in cities where the cost of living is higher. As Moretti says:

When I deflate nominal wages using a location-specific CPI, I find that the difference between the wage of college graduates and high school graduates is lower in real terms than in nominal terms and has grown less. At least 22% of the documented increase in college premium is accounted for by spatial differences in the cost of living.

This merely shows, as we’ve seen before, that income inequality is a lot more complex than political talking points would have you believe.

(Click here for an ungated version of Moretti’s paper.)

One thought on “Geography and inequality

  1. I would also like to see someone adjust “rising income inequality” for the 1986 tax law changes where tax shelters were eliminated. The CBO paper which adjusted for government aid and non taxable benefits found but for top 1%, not much increase in income inequality. I think much of the reported increase in income inequality for top 1% reflects things like changes in the tax code. In addition cost of living adjustment should be greatest for them since they are mainly in high cost of living areas. Next adjust for movement in and out of top 1%.

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