Meet the Author

Nelson Oliver |

Research Analyst

Nelson Oliver

Nelson Oliver is a research analyst in the Research Department of the Federal Reserve Bank of Cleveland. His primary interests include urban revitalization, housing policy, and applied microeconomics.

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Meet the Author

Stephan Whitaker |

Research Economist

Stephan Whitaker

Stephan Whitaker is a research economist in the Research Department at the Federal Reserve Bank of Cleveland. His current work includes research on housing markets and studies of state and local public finance.

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05.01.2012

Economic Trends

Regional Differences in Household Income

Nelson Oliver and Stephan Whitaker

Statistics on the distribution of personal income by region can be helpful context for thinking about many important questions. Can lower labor costs help the Southern states to lure corporate operations? Do the higher salaries of the Northeast and West attract Midwestern college graduates? Does everyone in the Northeast benefit from its concentrations of finance and government employment? Has immigration pulled down wages in the West?

Our analysis of recent Current Population Survey (CPS) data finds that differences in personal income are actually quite small between regions. If we account for important determinants of income, such as education and age, the differences shrink further. We also find little evidence that gaps have increased over the past decade.

As a first look at the regional distribution of personal income, we ranked the CPS respondents within each region by their total personal income, from low to high. We then divided each regional sample into one hundred equal groups. (The dollar figures in the charts below represent the incomes of individuals at the bounds between the groups, and they are referred to as percentiles. ) When plotting these values, the regions appear remarkably similar. We do not see masses of people in any region with significantly higher or lower wages compared to similarly ranked people in other regions.

The highest income plotted in the chart may seem surprisingly low, given all the attention paid to rising inequality. However, the very top-ranking incomes are not shown here. The highest incomes in the CPS are not released, for confidentiality reasons. Also, we exclude the 99th percentiles ($173,000 to $218,000) because they distort the scale and obscure the differences in the rest of distribution.

Next we subtracted off the equivalent nationwide dollar figure for each percentile. After this change, the distance on the graph between a high marker for one region and a low marker for another region indicates how much higher an equally ranked person’s income is in the higher region. The scale is in dollars, and the gaps for low-income people are small in these terms—just a few hundred dollars. In the upper half of the distribution, the gaps increase to $10,000. Only at the 95th percentile and above, where personal incomes are over $100,000, do we observe regional differences larger than $10,000. In percentage terms, the relatively high regional values are almost never beyond 112 percent of the national figure, and the lower values are rarely below 90 percent of the national figure. For the bottom half of the distribution, incomes in the Midwest are slightly higher. In the top half of the distribution, incomes are higher in the Northeast and lower in the South.

What could explain the differences that do exist between regions? Among other things, they could reflect differences in education levels, industry mix, and the age of residents. Below we summarize the differences between the regions on several measures in the CPS that relate to personal income. The Northeast and West both have higher percentages of adults holding undergraduate and graduate degrees. The Midwest has more adults working in manufacturing, while the Northeast has a smaller share employed in agriculture and a larger share in government. The South’s share of adults not in the workforce is 3 points higher than the Midwest’s figure. This measure includes retirees, discouraged workers, students, etc.

Descriptive Statistics of U.S. Regions

  Percent of region’s population
 

Northeast

Midwest

South

West

Age (average 15+)

45.25

44.99

44.64

43.94

Female

51.78

51.33

51.59

50.31

No degree

16.17

15.59

18.93

19.17

High school

30.24

31.66

29.35

24.5

Some college

23.54

28.26

26.81

29.05

Bachelor's degree

18.83

16.35

16.3

18.14

Graduate degree

11.22

8.14

8.62

9.13

Agriculture and mining

5.09

6.3

6.55

6.9

Manufacturing

4.3

7.23

4.37

4.8

Transportation and retail

9.13

9.55

9.08

8.78

Finance, insurance, and real estate

12.8

12.51

12.24

12

Services

6.96

6.22

7.07

7.91

Government

24.58

22.95

22.43

22.55

Not in the labor force

37.14

35.24

38.27

37.06

Source: Authors’ calculations using March 2011 CPS.

When we use these statistics, along with measures of race and occupation, we can explain about 42 percent of the variation in personal income. We plot the unexplained differences between people at each level of the personal income ranking in the chart below (these data points are highly variable, so we gathered them into 10 deciles to reveal their pattern). Comparing this to the second chart above, we can see that the range is narrower because individuals’ characteristics have explained much of the differences in their incomes. Remarkably, in the lower half of the distributions, there appears to be little or no difference between observationally similar people in different regions. In the higher percentiles, which will include many professionals in law, medicine, and finance, there are still only modest income advantages (less than $14,000) from living in the Northeast or West. For individuals at the top of the income rankings, personal characteristics do not explain as much of their incomes. The large regional differences in the top tenth decile cannot be explained away by differences in education or occupation.

Economic theory suggests that regional differences in income should be small because workers would migrate from one region to another if the differences were large. The lower supply in the sending region would increase wages, and the higher supply in the receiving region would lower wages until the wages equalized. Employers might also migrate with the same equalizing effect.

Wage differences may persist if income has to offset inequality in housing costs, taxes, and other cost-of-living differences. Consider the difference between purchasing a median-priced home in the South ($144,200 in 2011) versus the Northeast ($237,500) with a standard mortgage (30-year fixed, 20 percent down, 5 percent interest). The payment on the median home in the South is $619, while it is $1020 in the Northeast. This sums to $4,800 annually. Per capita taxes also differ. In Tennessee and South Carolina, state and local taxes are around $2,800 per person, while Connecticut and New Jersey governments collect over $5,800 per person. Cost-of-living differences could absorb the regional differences in income for many people.

What has been presented so far are 2011 data that reflect the recent slow recovery. Perhaps the gaps widen when the economy is growing quickly, or when some regions are growing faster than others. To look at time trends, we opted to focus on the largest gaps. Within each education category, the regional income differences are largest in the upper portion of the distribution. We calculated the gaps for individuals between the 75th and 95th percentiles. For people without a college degree, the largest gaps are between the Northeast and South. For people with college degrees, the largest gaps are between the Northeast and Midwest. We plot these differences over the last 12 years. The earnings gap between high income (75th-95th percentile) graduate degree holders in the Northeast and Midwest appears to have been smaller during the mid-decade expansion. The other four series do not display a recognizable difference between years of growth and years of recession. There might be up or down drifts, but these trends are small relative to the year-to-year variation, which prevents us from identifying them definitively.

Having looked at the data, we may be less concerned about the questions mentioned at the beginning. Interregional income differences appear to be modest, which is consistent with competitive national labor markets. After controlling for observable characteristics, such as education and occupation, only differences of $10,000 or less remain for 95 percent of working-age adults. Gaps large enough to overcome cost-of-living differences are found mostly in the top 10 percent of the distributions.