New Yorkers may earn more, but don't they get less bang for their buck?
The amount of money workers make varies substantially across America's cities and metros. Aside from differences in productivity and compensation, there are considerable differences in cost of living. This is why it may be harder to make ends meet in New York, San Francisco, Boston, or D.C. than in, say, Pittsburgh or Charlotte.
So, when differences in cost of living are taken into account, where do Americans actually make the most money?
To get at this, my colleague José Lobo of Arizona State University used data from the U.S. Bureau of Economic Analysis (BEA) to calculate a new metric he calls “real average wage per job.” This is based on recent BEA data that tracks the variation in cost of living using so-called Regional Price Parities (RPP), based on expenditures for food, transportation, housing, and education. As Lobo explains, the BEA already calculates a related statistic, real per capita personal income, a standard measure of average wealth that is similarly able to control for location-specific cost differences. But because income accounts for not only wages but also non-location specific sources of money like stocks and interests, Lobo wanted to look closer at just wages, which most closely reflect a place's economic base and underlying productivity.
The map below tracks this metric of real average wages per capita.
Knowledge hubs and energy centers—those that have both very high wages and generally fairly high costs of living, especially along the coasts—dominate the list.
At the very top of the list is the San Jose metro area, which covers much of Silicon Valley, and where average real wages top $75,000. Bridgeport-Stamford, Connecticut, and the central San Francisco-Oakland metro areas each also had real wages of more than $60,000. Other metros near the top of the list were a mix of knowledge and energy economies, including Durham, North Carolina; Midland and Houston, Texas; and Boston.
|Metros With the Highest Real Average Wages|
|Metro||Real Average Wages (2012)|
|San Jose-Sunnyvale-Santa Clara, CA||$75,288|
|San Francisco-Oakland-Hayward, CA||$60,562|
|California-Lexington Park, MD||$59,130|
|Durham-Chapel Hill, NC||$58,166|
|Houston-The Woodlands-Sugar Land, TX||$57,461|
Taking living costs into account does clearly normalize some of the big differences between coastal metros around the Bay Area, Greater L.A., and across the Boston-New York-Washington corridor, as well as college towns like Boulder and Raleigh-Durham, where wages are incredibly high in unadjusted terms. Still, even when we account for higher living costs, these metros remain among the places where workers are paid the best in real terms. The biggest difference may be that energy metros like Midland and Odessa climb to the top. The natural gas boom has rapidly increased wages in these parts of the country, while cost of living has still remained relatively lower than in their big city counterparts.
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What are the key factors that are associated with higher real wages?
My colleague Charlotta Mellander ran a correlation analysis of the key economic and demographic characteristics of metros that are associated with higher or lower real wages. While correlation of course does not imply causation, several interesting patterns emerged.
First off, real wages—adjusted for living costs—are closely correlated with overall average wages, with a correlation of .72. Real wages are also closely correlated with a basic measure of economic productivity, economic output per capita, even more so than regular, unadjusted wages are (.77 for real wage, versus .65 for unadjusted wages).
The pattern for real wages remains just about the same as what we expect from looking at overall wages and productivity. Real wages are higher in knowledge-based and talent-driven metros. They are positively associated with high-tech industry (.59), the share of workers in the creative class (.57) and the share of adults who are college graduates (.37).
Real wages are higher in larger, denser metros (with correlations of .35 to density and .54 to population size).
Real wages are also related to housing costs (with correlation of .41). This is not surprising, as housing costs reflect, in large part, the same underlying productivity differences that contribute to different wages.
Overall, adjusting wages for living costs provides a better window into how much people actually make. The gap between super expensive coastal metros—where housing costs are sky high—and others closes a bit, while energy metros, with high pay and lower costs of living, do substantially better. But workers in higher cost places still do better than most, even when higher costs for housing and other expenses are taken into account. Their higher wages more than compensate. This takes some of the wind out of the sails of the arguments that people are better off moving from higher cost to lower cost places. The underlying factors that improve productivity and increase wages in the first place help workers do better in these high-cost metros.
Of course, it is important to keep in mind is that we are looking here at averages. My own research shows that, while the average worker does better in higher-cost, higher-productivity metros, the benefits are largely concentrated in the hands of highly educated knowledge workers, whose wage gains are more than sufficient to offset higher living costs. It is lower-skilled, lower-paid blue collar and service workers who bear the brunt of high costs of living and whose wages are not enough to keep up. And this helps explain the patterns of migration that I explored a few weeks ago, where highly educated workers are moving to knowledge and energy metros, the places that lower-skilled workers have begun to flee.
The United States remains, and is becoming more and more, economically and geographically segregated across its more productive and higher-paying knowledge and energy metros versus the rest of the country.