Comparing incomes across regions within a country

Question

When looking at spatial disparities across regions within a country the standard approach that I have seen is to look at differences in incomes across regions.

However, this doesn’t control for the impact of local prices. I would have thought we should expect to see local prices increase in areas of higher income.

An additional challenge must be data availability here, in that I don’t know if there is good local price data available, certainly not in the country I work. I imagine that we could use local house prices/rents as some proxy for local prices and control for this.

Is there a standard way to control for local price effects when comparing incomes across regions? Or at least examples of analysis where this has been done well?

Thanks for any help,

hmmm16

Answer 1

In general, the way to control for local price effects would be to use the Purchasing Power Parity (PPP).

However, in practice this is very often impossible for regions within a country due to a lack of data.

So in practice, we often just compare incomes across regions within a country as they are.

Luckily, the differences in prices within countries are often not as large as across countries, especially in small countries, so this problem tends to be less severe within countries. Of course, this may not be the case in very large countries.

Answer 2

Is there a standard way to control for local price effects when comparing incomes across regions?

Yes this can be done using the Purchasing Power Parity (PPP) to adjust for purchasing power differential between regions.

For example, BEA has data on US regions.