YOU DECIDE: How important are state cost-of-living differences?

Date posted: April 13, 2012

Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.

Media Contact: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

By Dr. Mike Walden
North Carolina Cooperative Extension

Many people today are concerned about the cost of living, and with good reason. Certainly workers who have lost their jobs or had their hours cut back still have bills to pay, and now they must pay them with less income. But even folks who have kept their jobs see rising costs for gas and food, to name a few expenses, outpacing any gains they’ve made in wages and salaries.

But did you know the cost of living varies by where you live and in particular in which state you call home? Many factors are behind these interstate cost differences, including the price of land and housing, access to energy supplies, the cost of inputs and the availability of cultural, entertainment and leisure-time amenities.

Indeed, for decades researchers have been tracking variation in the cost of living in states. I just received the latest numbers for 2011 from our friends at the Missouri Economic Research and Information Center, who compile and analyze the numbers. They provide some very interesting results.

First, the cost of living does vary significantly between states. Using the 2011 figures, the difference in the cost of living between the highest cost (Hawaii) and lowest cost (Oklahoma) states is a whopping 86 percent. That is, you would need 86 percent more income to achieve the same standard of living in Hawaii as you would in Oklahoma.

Of course, part of the reason it costs more to live in Hawaii is that you can see the beautiful landscape and ocean and experience the comfortable weather on a daily basis. In other words, when you buy or rent a home in Hawaii, you’re effectively purchasing access to the weather and scenery.

Many may think Hawaii is a special case, so let’s limit our cost-of-living comparisons to the continental U.S. The District of Columbia (D.C.) and Connecticut have the highest costs of living, and Oklahoma is still the lowest. The spread between D.C. and Oklahoma is 57 percent, and the difference between Connecticut and Oklahoma is 47 percent. These aren’t quite as big as for Hawaii, but they’re still significant.

So where does North Carolina fall in these cost-of-living rankings? In 2011, North Carolina ranked as the 21st least costly state. Twenty states had costs of living lower than North Carolina’s, while 30 states (and D.C.) had higher costs of living. Furthermore, North Carolina has maintained this ranking for several years.

Also, North Carolina’s cost of living is lower than for two neighboring states — South Carolina and Florida — but higher than for three other neighbors — Tennessee, Georgia and Virginia. However, the spread in the cost of living for North Carolina, South Carolina, Florida, Georgia and Virginia is narrow. North Carolina’s cost of living is only 1 percent lower than in Florida and South Carolina, and only 0.2 percent higher than in Virginia and 3 percent higher than in Georgia.

The big difference is with Tennessee, whose cost of living is 7 percent under that for North Carolina. Tennessee also has the second-lowest cost-of-living in the country.

So why do all these numbers matter, except for states that might want bragging rights for the lowest (or highest) cost of living?

There are at least two important uses for the cost-of-living indicators. Let’s say you’re a freshly graduated accountant, and you are considering taking a job either in North Carolina or New York. In 2011, the cost of living in New York was 37 percent higher than the cost of living in North Carolina. This means that just to achieve the same standard of living the the salary offer from the job in New York would have to be more than one-third higher than the prospective salary in North Carolina.

Or let’s say you’re interested in where North Carolina ranks in per person spending on a particular government program. You find a publication that has spending per person for every state. Because differences in the cost of living between states makes dollars in the states have different purchasing power, the spending amounts should be adjusted first by the cost-of-living factors before rankings are made.

The cost of living also varies within states, sometimes by as much as 40 percent. Usually, living costs are lower in more rural areas and higher in denser urban regions. Preferences play a role in where people choose to live. Folks who like wide open spaces may choose rural locations, whereas individuals who prefer the energy, shopping and restaurants in cities may be willing to spend more for the access to these amenities.

Dollars aren’t always what they seem, both in time and space. We often recognize how the value of a dollar may change over time, but sometimes we forget the value can also be higher or lower depending on where it is spent. I suggest you decide not to make that mistake.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective/

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