Regional prices and real incomes in the UK

ABSTRACT

Official figures on regional incomes in the UK are compiled on a nominal basis. This paper develops a contemporary measure of relative regional prices in the UK, which suggests that the impact on relative regional living standards is substantial. Interregional differences in real incomes are therefore considerably smaller than nominal ones. It is hoped this study will stimulate further research. Insofar as prices are systematically higher in wealthier regions, there are important policy ramifications and public policy focused on regional assistance and redistribution should take account of these.

KEYWORDS:

• regional disparities
• prices
• UK
• spatial inequalities
• wages

JEL:

• C43
• J31
• R1
• R12

ACKNOWLEDGEMENTS

The author gratefully acknowledges the advice and support of Professor Alex De Ruyter and Dr Bruce Philp – our numerous conversations have proved invaluable. This paper was also hugely improved by the comments of the three anonymous reviewers.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the author.

Notes

1. The modification made was introduced by Eurostat in the 1980 comparison in order to take into account the extent to which goods are representative in different countries (e.g., different brands of cereal might be sold in different countries, even though the basic heading under which they fall is identical). As goods and services across regions in the UK are largely homogeneous, this is not a significant issue for subnational PPPs in the UK and consequently the EKS method in its original form is used by both the ONS and in this paper.

2. Symmetric insofar as both regions have equal importance.

3. Doubling both the Laspeyres and Paasche indices should double the average.

4. The important distinction between capital gains and income being that whilst the latter can be spent immediately, the former requires the sale of the asset in order to be realized.

5. There is a minor issue here insofar as the Scottish tenure data are given at the level of the local authority, whereas rental prices are given for broad rental market areas. In practice, many of these are fully coterminous, whilst almost all of the remainder exhibit only very minor differences around the edges and have extremely similar rental prices for each class of property.

6. In practice, the overall results are remarkably insensitive to extremely large changes in the estimated property mix in Northern Ireland giving confidence in the robustness of the approach.

7. This uses a weighted geometric mean of average rents for each property size (by number of bedrooms) in order to aggregate to each region.

8. As accurate weights exist (the weights in question being the proportion of individuals living in houses with each number of bedrooms in each region) below the basic heading level, we use these in place of assessing ‘representativeness’. An alternative would be to use a weighted country–product–dummy regression. In the present case, the procedure outlined by Selvanathan and Prasada Rao (1994), which gives estimates equal to a Törnqvist index-based EKS procedure, gives almost identical results to the present paper.

9. Regional Gini coefficients tend to be low compared with the figures usually as within-region inequality is typically an order of magnitude greater than between-region inequality.