Price Differentials and Trends in State Income Levels: A Research Note

Abstract

Most of the discussion of regional income convergence in recent decades has operated under the assumption, either explicit or implicit, that spatial and temporal differences in regional prices (i.e., cost of living and inflation) are negligible. Using five different measures of interstate and interregional income inequality, we examine the evolution of regional income patterns before and after adjusting for price differences. Our results suggest that the common practice of overlooking interspatial differences in cost-of-living and inflation may yield a false understanding of regional income trends and, in tum, false policy prescriptions. Specifically, the pattern of regional income convergence through the 1970s followed by divergence in the 1980s are lost if spatial and temporal differences in regional prices are considered.