Finance and Economics Discussion Series (FEDS)
May 2020 (Revised January 2023)
A Comparison of Living Standards Across the States of America
Elena Falcettoni and Vegard M. Nygaard
We use an expected utility model to examine how living standards, or welfare, vary across the U.S. and how each state’s welfare has evolved over time. Our welfare measure accounts for cross-state variations in mortality, consumption, education, leisure, and inequality. We find that average living standards differ considerably across states. This is robust to allowing for endogenous interstate migration and to including housing in the model, and holds even when computing welfare conditional on education, gender, and race. Although states experienced heterogeneous welfare growth rates between 1999 and 2015 (ranging from 1.68 to 3.73 percent per year), there is no evidence of convergence in welfare levels, including during the sub-periods preceding and following the Great Recession. Whereas the level of real per-capita income is a good indicator of the level of welfare across states (correlation=0.75), the growth rate of real per-capita income is a poor proxy for the growth rate in welfare (correlation=0.42). Our welfare decomposition analysis can help identify what policies are likely to be most effective at increasing average living standards in the United States.
Keywords: Welfare comparison, Living standards, Inequality
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