Working Paper

A Comparison of Living Standards Across the States of America

Abstract: We use an expected utility framework to examine how living standards vary across the United States and how each state's living standards have evolved over time. Our welfare measure accounts for cross-state variations in mortality, consumption, education, inequality, and cost of living. We find that per capita income is a good indicator of living standards, with a correlation of 0.80 across states. Living standards in most states, however, appear closer to those in the richest states than their difference in per capita income would suggest. Whereas high-income states benefit from higher life expectancy, consumption, and college attainment, low-income states benefit from lower cost of living. All states experienced positive welfare growth, and hence rising living standards, between 1999 and 2015. The annual welfare growth rate, however, varied from 1.38 to 3.76 percent across states due to varying gains in life expectancy, consumption, and college attainment, with life ex pectancy accounting for 50.3 percent of the variation. Finally, the growth rate of per capita income is a poor proxy for how fast living standards are rising in a particular state since the correlation between welfare growth and per capita income growth is only 0.38, and deviations are often large.

Keywords: Expected utility; Living standards; Inequality; Cost of living; Welfare comparison; States of America; Quality of life;

JEL Classification: D63; I31; O50; R13;

https://doi.org/10.17016/FEDS.2020.041

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2020-05-22

Number: 2020-041