The Cost of Living… Does Regional Variation Exist?

Jul 8, 2007 by

At times, I have heard from people that it is cheaper to live in Location X than Location Y because “the cost of living is lower.” Usually, when someone says that the cost of living is lower in an area, it means that the wages for a given job are lower there as well. With that being said, does it really make sense to move to Location X to save money?

The answer to this question may be different today than it was a few decades ago. The amount of “wealth” we experience is defined by a combination of our income and the schedule of prices that we face. If prices are lower in one location than another, but our wages are the same in both areas, we will feel wealthier in the location with lower prices. Sometimes, less urban areas are considered to be better values, as they are stereotyped as having lower prices. Is this really true?

 In order to understand much regional price variation might affect us, we must first consider what we buy with our money. Are the prices of our goods determined on a national or local level? The average person spends money on housing, food, manufactured goods (clothing, electronics, etc.), services, entertainment, transportation, and utilities. Some of these categories are more sensitive to regional variation than others.

Manufactured goods tend to have constant prices across the nation. A 4 GB iPhone costs $499 regardless of whether it is purchased in New York City or Little Rock, Arkansas. Services, when delivered remotely, tend to have national prices, while when delivered locally, have regional prices. The price of a haircut is determined by the competition among local barbers, while the price of webhosting is affected by national competition. Entertainment varies in this manner as well; live entertainment likely has local variation, while to cost of buying a DVD is the same for buyers across the nation. As food is often manufactured on a national level, there is often little variation in the cost of food, outside of a fine restaurant setting. (McDonald’s has the Dollar Menu in all locations, affluent and not.)

Housing is often the largest expense in a person’s budget, and is perhaps the most subject to regional variation. Does it make sense to move to an area with lower housing costs? All things being equal, it probably does make sense if you are renting, but makes no sense if you are buying. Assuming an equal rate of appreciation in both settings, buying more house will force you to invest more of your money in real estate. As many Americans have few investments beyond their homes, being forced to make a larger investment can be a good thing. Thus, having to buy a home of a larger value may give you more options once you reach retirement, as you can then potentially sell the home, buy a new home in a cheaper area, and use the remaining money to assist in paying for your expenses. But, the deck is stacked even worse against the regions with low housing costs. If there is a less competitive market for housing (which is indicated by the lower prices), the appreciation rate of housing may be lower. Thus, the investment will grow slower as well.

Finally, sometimes more “expensive” locations have more industry in them than cheaper locations. This can be an advantage for two reasons. First, although you may have a job now, the additional job opportunities in the area are still important. With multiple employers available, you can more easily change firms in order to advance your careers. Also, having additional employers in the area available to you may be useful in the event that your job disappears and you need to seek further employment in the area. Also, if there are more companies in the area, there may be more price competition among firms. This may help reduce the cost of the locally-produced goods that you purchased. Thus, living in an “expensive” area may be cheaper than you think. Do you really buy that many locally-produced goods, beyond housing?

2 Comments

  1. Bryan

    Excellent post! What you wrote about manufactured goods having more or less uniform prices throughout the nation made me think about my own purchasing habits. I tend to buy a lot online — sometimes even nonperishable groceries. As such, my costs of buying those goods would not change regardless of where I lived in the country unless my shipping costs changed. The Internet has probably made markets in general more fair since it has made so many more marketplaces national if not global. I wonder if there was greater fluctuation in the local prices of manufacturing goods before the introduction of mail-order catalogs, as I think those things started the process which the Internet has accelerated.

  2. Chasqui

    Here’s my 2 cents: I think the reasoning behind the spending and expenses portion of the article is well laid out. Indeed most “local” expenses (housing) are influenced by what the local market will bear – which is determined by local incomes. Also true is that the price of many items behave like those of commodities – not greatly influenced by the vagrancies of the local market. I think that your argument is bolstered by the *savings* aspect as well. Given a set savings rate (say 10 percent of one’s salary) a person in the “more expensive areas” will fare better, particularly in the long-term. In the “expensive” locations, as you stated, salaries tend to be higher (to compensate for the local expenses). For those who save be it in a 401k, or under the mattress, that ten percent of the larger salary makes a big difference when it comes time to retire. Lets look at the salary of an accountant. We’ll use Monster.com’s median salary for Mobile, Alabama and San Francisco, California. The salaries are $35,911 and $48,389, respectively. Lets assume a savings rate of ten percent, over 50 years, using 3 percent inflation and a 10 percent investment return. The difference between the two is over half a million dollars! That’s quite a lot of “extra” money with which to retire in the “less expensive” place.

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