Thinking of moving to the big city to pursue a bigger paycheck? Or perhaps you’re dealing with employees who intend to do so? While it’s true that employers in major metropolitan areas tend to dole out higher wages, new research shows that increased spending power might not come along on the trip.
Wages remain stagnant in many quarters of the labor force, and relocation can be a viable option for those in search of higher salaries. However, job seekers should look beyond base compensation and consider more measures related to cost of living, according to Benjamin Cover, an economist with the U.S. Bureau of Labor Statistics.
In his April 2016 article “Purchasing power: using wage statistics with regional price parities to create a standard for comparing wages across U.S. areas,” Cover argues that regional differences affect how far workers can stretch their paycheck, and that certain occupations are affected by local prices and concentration of employment.
Cover incorporated regional price parities (RPPs) from the U.S. Bureau of Economic Analysis. RPPs reflect the overall price level of goods and services in the United States. If an area’s RPP is greater than 100, its goods and services cost more than the national average, and if it’s below 100, goods and services cost less than the average.
Using mean wages for metropolitan areas in the U.S. and factoring in the RPP for each area, Cover learned that the San Jose, Calif., region, which includes Silicon Valley, offers the highest purchasing power in the country. The area already has the highest mean wages in the country, and those wages are lofty enough to offset an RPP of 122, reflecting the area’s costly nature.
The San Jose, Calif., region, which includes Silicon Valley, has the highest purchasing power in the U.S.
But other high-paying regions didn’t fare so well. San Francisco, ranked second for mean wages, fell to 10th place in purchasing power when its RPP was factored in. The New York City metro area, which is consistently among the top five in mean wages, dropped to 61st in purchasing power.
Some of the regions with strong spending power may come as a surprise, Cover said. Among them are:
• Durham, N.C. (ranked second behind San Jose).
• Huntsville, Ala. (ranked third).
• Hartford/West Hartford/East Hartford, Conn. (ranked fourth).
Cover also examined the relationship between wages and relative prices as they relate to occupations. He found that food service workers and cashiers—two of the fastest-growing occupations nationally—earn more in San Francisco and San Jose than their counterparts in most other parts of the country, but when adjusted for RPP, their wages fell to the bottom 25 percent nationally.
Consequently, food service workers and cashiers can better stretch their paychecks in low-cost metro regions, even though they’re likely not earning as much as those in metros with high mean wages.
“It might seem obvious high-priced urban areas would offer high wages, but the actual wages of an area only tell part of the story,” Cover said. “When wages are adjusted to account for cost of living, low-wage areas often grant workers superior purchasing power. For job seekers, the overall purchasing power of a wage in a given area is often more important than the wage itself.”
Despite recent sluggish wage growth in most industries, there are a few signs that things are improving, and a move to a new city may not be necessary for some. Nearly one out of five (19.9 percent) of manufacturers increased compensation for new hires in April, according to the Society for Human Resource Management’s Leading Indicators of National Employment (LINE) report. That marks the highest monthly total since data collection for LINE began in 2004.
New U.S. census data also show that household incomes are starting to rise, albeit slowly, for Millennials and members of Generation X, according to an analysis by Robert Shapiro for the Brookings Institution, a nonprofit think tank based in Washington, D.C.
Shapiro, a senior fellow of the McDonough School of Business at Georgetown University, focused on households headed by women and men who were ages 20 to 29 in 2009. Census data show their household incomes, adjusted for inflation, grew 3.6 percent per year from 2009 to 2012 and 4.5 percent per year in 2013 and 2014.
Turning to Generation X, Shapiro examined households headed by people ages 35 to 39 in 2009. In 2013 and 2014, their incomes rose by 2.3 percent per year. While not substantial, it represented a vast improvement from 2009 to 2012, when their incomes actually declined 0.4 percent per year, Shapiro said.
Joseph Coombs is a senior analyst for workforce trends at SHRM.