Forthcoming – Adjusting inequalities for regional price parities: importance and implications

I have received news that another of my article has been accepted. This time the acceptance is from the Journal of Regional Analysis & Policy and the paper was co-authored with my dear friend Youcef Msaid. We make a simple argument regarding inequality. All incomes are aggregated in distributional measurements using either no price deflators (nominal incomes) or national deflators (when there is a need to track centiles over time). We argue that this is an error as there are intra-national price disparities that suggest the need to use intranational deflators to create purchasing power parity.

This correction has two effects. The first is modest: it reduces the level of inequality nationwide by 0.5%. The second is more important. It changes the spatial distribution of where the bottom 10% is located. Uncorrected figures have poorer states overrepresented in the bottom decile, while corrected figures have much of that decile living in urban areas in NY and CA. There are policy-relevant implications. The first is that inequality-combatting policies may need to be better calibrated to target the true bottom of the income distribution. The second is that the “reallocation” of the bottom fractile goes largely to states where the housing is expensive and its supply is inelastic. This suggests that economists and policy-makers who emphasize the need to ease supply restrictions to help the cities become more affordable to the poorest may be onto something.

A table is attached below for the first key result. The rest will be available upon publication. The working paper is available hereTable1RPP




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