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.)