System Working Paper 17-30
Published December 13, 2017
We analyze the geographic inequality of economic well-being among U.S. cities by utilizing a novel measure of quantity based product-level economic well-being, i.e., the number of goods and services that can be purchased by consumers with an average city wage. We find a considerable cross-city dispersion in the economic well-being and the geographic dispersion has been on the steady rise since the mid-1990s for most goods and services under study. Strong geographic correlations exist in the local economic well-being and our empirical analysis based on a Global VAR (GVAR) model suggests that national shocks are an important source behind it. On average, about 30-35% of the variance of local well-being is explained by common national shocks, but the impact of common national shocks varies considerably across products, albeit to a lesser extent across cities. Nationwide unemployment shock, for example, has a stronger effect in the products whose prices are adjusted more frequently and in the cities that have a larger fraction of high-skill workers. Taken together, our results indicate that the geographic inequality of economic well-being observed in the U.S. has proceeded over time mainly through the products with more flexible price adjustments and in the cities with higher concentration of skilled workers.