U.S. Income Comparisons with Regional Price Parity Adjustments

John A. Bishop; Jonathan M. Lee; Lester A. Zeager

doi:10.1515/bejeap-2018-0024

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U.S. Income Comparisons with Regional Price Parity Adjustments

John A. Bishop , Jonathan M. Lee und Lester A. Zeager

Veröffentlicht/Copyright: 5. September 2018

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Aus der Zeitschrift The B.E. Journal of Economic Analysis & Policy Band 18 Heft 4

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.

Keywords: regional price parities; poverty; inequality; tax progressivity; agglomeration

JEL Classification: D31; I32

Abbreviations:

ACCRA:: American Chambers of Commerce Researchers Association
BEA:: Bureau of Economic Analysis
BLS:: Bureau of Labor Statistics
CPI:: Consumer Price Index
CPS:: Current Population Survey
NAS:: National Academy of Sciences
PPP:: Purchasing Power Parity
RPP:: Regional Price Parity
SMSA:: Standard Metropolitan Statistical Area

Appendix

Table 8:

Census Bureau regions and divisions.

Region 1 – Northeast Division 1 – New England (NE): Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont Division 2 – Middle Atlantic (MA): New Jersey, New York, Pennsylvania

Region 2 – Midwest Division 3 – East North Central (ENC): Indiana, Illinois, Michigan, Ohio, Wisconsin Division 4 – West North Central (WNC): Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota

Region 3 – South Division 5 – South Atlantic (SA): Delaware, District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, West Virginia Division 6 – East South Central (ESC): Alabama, Kentucky, Mississippi, Tennessee Division 7 – West South Central (WSC): Arkansas, Louisiana, Oklahoma, Texas

Region 4 – West Division 8 – Mountain (MTN): Arizona, Colorado, Idaho, New Mexico, Montana, Utah, Nevada, Wyoming Division 9 – Pacific (PAC): Alaska, California, Hawaii, Oregon, Washington

Table 9:

Lorenz and concentration ordinates for U.S. family incomes, 2012 (weighted CPS data).

	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)
Decile	Lx	Ly	(2) − (1)	Ly/x	(4) − (1)	Cx−t	(6) − (1)	Cx−t∗	(8) − (1)
1	0.0105	0.0106	0.0001	0.0108	0.0003*	0.0135	0.0030*	0.0139	0.0034*
					(0.0001)		(0.0001)		(0.0002)
2	0.0375	0.0381	0.0006	0.0386	0.0011*	0.0464	0.0089*	0.0476	0.0101*
					(0.0002)		(0.0002)		(0.0003)
3	0.0770	0.0785	0.0015	0.0794	0.0024*	0.0918	0.0148*	0.0944	0.0174*
					(0.0003)		(0.0002)		(0.0005)
4	0.1298	0.1323	0.0025	0.1337	0.0039*	0.1499	0.0202*	0.1542	0.0244*
					(0.0004)		(0.0003)		(0.0006)
5	0.1970	0.2009	0.0039	0.2027	0.0057*	0.2218	0.0248*	0.2278	0.0308*
					(0.0005)		(0.0003)		(0.0007)
6	0.2806	0.2861	0.0055	0.2885	0.0079*	0.3093	0.0287*	0.3173	0.0367*
					(0.0006)		(0.0003)		(0.0007)
7	0.3834	0.3904	0.0069	0.3933	0.0099*	0.4152	0.0318*	0.4251	0.0417*
					(0.0007)		(0.0004)		(0.0010)
8	0.5112	0.5192	0.0080	0.5223	0.0111*	0.5442	0.0329*	0.5550	0.0437*
					(0.0007)		(0.0005)		(0.0011)
9	0.7777	0.7853	0.0076	0.7880	0.0103*	0.8085	0.0308*	0.8182	0.0405*
					(0.0049)		(0.0045)		(0.0050)

Lx is the Lorenz curve for family incomes, Ly is the Lorenz curve for RPP-adjusted incomes, Ly/x is the concentration curve for RPP-adjusted incomes ordered by unadjusted incomes (x), Cx−t is the concentration curve for (family income - federal taxes) ordered by x, and Cx−t∗ is the concentration curve for (family income - federal taxes)/RPP ordered by x. Standard errors (matched pairs) are from Bishop, Chow, and Formby (1994).

Table 10:

Generalized Gini and concentration coefficients, 2012 (weighted CPS data).

	(1)	(2)	(3)	(4)
Parameter	Gx	Ly/x	Cx−t	Cx−t∗
v = 2.0	0.4504	0.4395	0.4095	0.3986
v = 1.5	0.3091	0.3000	0.2767	0.2678
v = 3.0	0.5953	0.5849	0.5500	0.5393
v = 5.0	0.7223	0.7143	0.6780	0.6693

Gx is the Gini coefficient for family incomes, Cy is the concentration index for RPP-adjusted incomes ordered by x, Ly/x is the concentration curve for RPP-adjusted incomes ordered by unadjusted incomes (x), Ct−x is the concentration curve for (family income - federal taxes) ordered by x, and Cx−t∗ is the concentration curve for (family income - federal taxes)/RPP ordered by x. For a discussion of the generalized (extended) Gini coefficient, see Lambert (2001, 115-6).

Table 11:

Full OLS estimates and summary statistics for agglomeration analysis (weighted CPS data).

		Estimated coefficient
	(1)	(2)	(3)
Variables	Summary statistics (Std. Dev.)	Ln(Income)	Ln(RPP Adj. Income)
Small Metro	0.173	0.084***	0.030**
	(0.378)	(0.012)	(0.012)
Medium Metro	0.270	0.134***	0.057***
	(0.444)	(0.011)	(0.011)
Large Metro	0.359	0.223***	0.035***
	(0.480)	(0.012)	(0.012)
Number of Children	1.066	0.006*	0.005
	(1.181)	(0.004)	(0.004)
Age	49.330	0.011***	0.011***
	(15.661)	(0.000)	(0.000)
Full-time Experience	28.017	0.016***	0.016***
	(24.647)	(0.000)	(0.000)
Part-time Experience	4.733	0.009***	0.008***
	(13.996)	(0.000)	(0.000)
Male	0.527	0.085***	0.087***
	(0.499)	(0.008)	(0.008)
High School Grad.	0.464	0.332***	0.328***
	(0.499)	(0.015)	(0.015)
Associates Degree	0.104	0.505***	0.499***
	(0.306)	(0.018)	(0.018)
Bachelor’s degree	0.202	0.793***	0.780***
	(0.402)	(0.016)	(0.016)
Masters/Ph.D.	0.122	0.967***	0.948***
	(0.327)	(0.018)	(0.018)
Hispanic	0.146	−0.266***	−0.286***
	(0.353)	(0.012)	(0.012)
Black	0.120	−0.392***	−0.386***
	(0.324)	(0.013)	(0.013)
Asian	0.051	−0.100***	−0.146***
	(0.220)	(0.019)	(0.019)
Other Race	0.028	−0.198***	−0.212***
	(0.164)	(0.027)	(0.027)
Constant		9.376***	9.506***
		(0.028)	(0.028)
Observations		52,041	52,041
R-squared		0.334	0.326

Standard errors in parentheses.
*** p < 0.01, ** p < 0.05, * p < 0.1.

Lx is the Lorenz curve for family incomes, Ly is the Lorenz curve for RPP-adjusted incomes, Ly/x is the concentration curve for RPP-adjusted incomes ordered by unadjusted incomes (x), Cx−t is the concentration curve for (family income − federal taxes) ordered by x, and Cx−t∗ is the concentration curve for (family income − federal taxes)/RPP ordered by x.

Acknowledgements

The authors wish to acknowledge helpful comments from Paul Carrillo, John Formby, Juan Gabriel Rodriguez, and an anonymous referee.

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https://doi.org/10.1515/bejeap-2018-0024

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regional price parities; poverty; inequality; tax progressivity; agglomeration