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Real wages, wage inequality and the regional cost-of-living in the UK

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Abstract

This paper reassesses how estimates of wage inequality from 1997 to 2008 change when regional variations in the cost of housing in the UK are taken into consideration. In order to do so, the real wage is deflated by a specially constructed regional retail price index (RPI). Results show that although regional differences in the cost of living exist, they do not affect significantly the wage difference between workers with a graduate education and workers with a high school degree, and the change of this differential over time, while they affect regional differences in real wage growth. The regional RPI reveals that the national RPI underestimates the cost-of-living of workers in London, and the South East and overestimates the cost-of-living for the majority of the other regions.

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Notes

  1. ONS (2013b) provides evidence that housing expenditure represents the first highest spending category for the UK.

  2. US college graduates are usually defined as workers with 16 or more years of education. See Card and Lemieux (2001) for a comparison between US and UK definition of education.

  3. Konus (1924) first defined a true cost-of-living as the minimum cost of achieving some reference welfare level when the price vector is p\(_{t}\), relative to the minimum cost of achieving the same welfare with the price vector p\(_{s}\).

  4. No data for cost of housing (rent/price) at regional level are available prior 1997, so we start the analysis at this date.

  5. Since a cost-of-living index measures the average change in prices with reference, not to a fixed list of demands, but to a fixed standard of living (Crawford and Smith 2002), weightings attached to item price indices should be based on quantities. If quantities are unchanged, the index should vary in direct proportion to the required expenditure. Because quantities are most of the time not observable by researchers, expenditure shares are used on the basis that these are reasonable proxies for unobserved quantities.

  6. The total housing expenditure used to derive the weights includes rent, water and other charges, council tax, and other regular housing payments such as repairs and maintenance. The total consumption expenditure includes the total housing expenditure, fuel, light and power, food expenditure, alcoholic drinks, tobacco, clothing and footwear, household goods, services, personal goods, and services and motoring. The variable P551tp capturing total expenditure is derived by the ONS as the sum of various components as above. For each component, the LCF/FES/EFS ask the question: “How much did you actually pay last time for ...”. In similar vein to gross rent, missing values have been imputed before releasing the data to the public. Details of the questions for the components can be found in the “Living Costs and Food Survey 2008: VOLUME B, Part 2, The Household Questionnaire”.

  7. The question and variable (P516tp) related to gross rent are in fact the same in all versions of the data. See question 266 RENTAMT in LCF, question 70.5 QRENTS1 in FES and question 153 RENTAMT in EFS.

  8. In fact, Moretti (2013) only uses three weights that are 0.356, 0.355, and 0.381 for the 1980, 1990, and 2000, respectively. The weights do not therefore reflect the proportion of housing expenditure by local area nor by education.

  9. The available data for the UK do not allow calculating the cost-of-living by education. Firstly, most of the data collect expenditure at household level. Secondly, the sample size would be too small to derive accurate figures. For example, using the Living Costs and Food Survey (2008) when calculating the weight for housing consumption (WH) by region considering the head of household with a university degree or more, the number of observations only ranges from 1 to 34.

  10. This deviates from Moretti (2013) who uses as dependent variable the nominal wage rather than the wage deflated by the national RPI. The use of wage deflated by the national RPI here is motivated by the fact that, firstly the vast majority of the UK literature does actually use real wage rather nominal wage; secondly, one of the aims of this paper is to shed lights on the implications of the difference between national and regional RPI.

  11. See Duranton and Monastiriotis (2002) for a discussion on spatial selection bias.

  12. The ONS (2014) shows that, for example, between 2000–2001 and 2003–2004 the general trend for migration between places in England was of net migration to predominantly rural settlements from predominantly urban ones. This overall trend continued from 2003–2004 to 2008–2009 although the extent of net migration to predominantly rural settlements was decreasing.

  13. Appendix Table 10 reports fuller results for Table 6. Additionally, Appendix Table 11 reports the main estimates as Table 6 but separating the sample in young, middle age, and old groups.

  14. Including regional fixed effects to control for unobserved differences across regions the level of the estimates decreases further, without changing dramatically.

  15. Moretti documents that in 2000 the share of college workers in the 10 cities with the highest fraction of workers with a college degree or more varies between 58 and 41 %. Similarly, the fraction of workers in the 10 cities with smallest share varies between 15 and 12 %. This is different from the UK, where the highest share of graduate workers in 2008 in London corresponds to 43 %, while the lowest share is found to be less 17 % in the North East.

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Acknowledgments

I am grateful to the Editor (Michael Lechner) and two anonymous referees for their comments and suggestions. I would like to thank Jonathan Wadsworth for several suggestions and encouragement. My thanks also to Ian Crawford, Jim O’ Donoghue and Trudie Schills for fruitful discussions, and to seminar participants at the RES Annual Conference 2011, WPEG Annual Conference 2011, 13th IZA/ESSLE and EALE Conference 2011 for comments and suggestions. The Expenditure and Food Survey, Labour Force Survey and the Family Resources Survey data are made available through the UK Data Archive (UKDA). Remaining errors are my own.

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  1. National Institute of Economic and Social Research, 2 Dean Trench Street, Smith Square, London, SW1P 3HE, UK

    Cinzia Rienzo

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  1. Cinzia Rienzo
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Correspondence to Cinzia Rienzo.

Appendix

Appendix

See Tables 10 and 11.

Table 10 Real national and real regional conditional wage difference between college graduate and high school graduate workers, full regression results
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Table 11 Real national and real regional conditional wage difference between college graduate and high school graduate workers, by young, middle age and old workers
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Rienzo, C. Real wages, wage inequality and the regional cost-of-living in the UK. Empir Econ 52, 1309–1335 (2017). https://doi.org/10.1007/s00181-016-1122-4

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