from the St Louis Fed
— this post authored by Maximiliano Dvorkin and Hannah Shell
Intuition tells us that a $40,000 income in Nebraska will go farther in terms of purchasing power than in California. Indeed, cost of living differences across states are important factors to consider when comparing income and budget constraints. A new dataset should help with those comparisons.
Comparing Cost of Living across States
Recently, the Bureau of Economic Analysis released the Regional Price Parities (RPPs), a dataset that allows economists to directly compare the cost of living at the state level. RPPs measure the differences in the price levels of goods and services across states and metropolitan areas for a given year. RPPs are expressed as a percentage of the overall national price level for each year, so RPPs higher than 100 represent state prices higher than the national average and vice versa.
RPPs are important because they help compare the purchasing power behind a person’s income in different areas of the country. For example, an income of $47,520 in Hawaii has the equivalent purchasing power of an income of $34,480 in Mississippi because both of these incomes divided by the state’s RPP equal $40,000.
In 2015 (the most recent year for which data are available), Hawaii’s RPP (118.8) was higher than that of any state or the District of Columbia. The others with the highest RPPs were:
States with the lowest RPPs were:
The figure below shows median household income in U.S. states in 2015 on the horizontal axis against the same median household income adjusted by RPPs on the vertical axis. States that fall on the dotted line have price levels equal to the national average. In other words, the nominal and RPP adjusted incomes are the same. States above the line have an RPP below the national average, and states below the line have an RPP above the national average.
