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

Income differences across US cities are well documented, but little is known about the level of market-based consumption that residents are able to afford. We provide estimates of market consumption by commuting zone for households in a given income or education group, and we study how they relate to local prices. To measure prices at the commuting zone×income level, we build local consumption price indices that aggregate commuting-zone specific prices from over 140 distinct products. We find that geographical differences in local prices are especially large for low-income households. The spatial standard deviation of the price indexes for the low-income group is almost double that for the high-income group. Using data that track household consumption for 5% of US population, we relate the real consumption that low-skill and high-skill households enjoy in each commuting zone to the price index. We find that for college graduates, there is no relationship between real consumption and local prices, suggesting that college graduates living in cities with high prices —including the most expensive coastal cities—enjoy a real consumption on average similar to college graduates with the same observable characteristics living in cities with low prices—including the least expensive Rust Belt cities. By contrast, we find a significant negative relationship between real consumption and local prices for high school graduates and high school drop-outs, indicating that expensive cities offer lower real consumption 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 20.9% decline in real consumption.