U.S. Income Comparisons with Regional Price Parity Adjustments

Abstract

Abstract Using official regional price parities (RPPs) recently released by the U.S. Bureau of Economic Analysis, we investigate how RPP adjustments affect the entire distribution of U.S. family incomes, poverty, inequality, tax progressivity, and metro-size agglomeration premiums. We find that higher-income families tend to live in higher-price areas, so regional mean incomes converge as real incomes fall in richer, higher-cost regions and rise in poorer, lower-cost regions. Further, the differences in poverty rates for the metro and non-metro areas vanish and we find re-rankings in poverty rates among the 9 Census Divisions. RPP adjustments also influence income inequality and effective U.S. tax progressivity. They increase effective federal tax progressivity by more than 25 %, equivalent to a $2,500 cash transfer. When we control for local prices and the characteristics of the family head, income (agglomeration) premiums for major metropolitan areas largely, but not completely, disappear.