Real earnings disparities in Britain

This report estimates housing-cost-earnings differentials across labour market areas in Britain. We show that quality-adjusted housing costs rise on average, one for one with the skill-adjusted earnings of the average working household. However, the relationship is Ushaped, with relatively high housing costs in places at the bottom and top ends of the wage distribution. This variation in housing costs means nominal wages are uninformative about real income disparities. If we assume spatial equilibrium and treat the cost-earnings differentials as estimates of the value of amenities, we can rank cities in terms of quality of life and estimate the value of different amenities. Our work improves on previous research by using longitudinal data on workers to estimate skill-adjusted labour market earnings differentials (net of taxes), using micro data on housing transactions, and by considering the implications of capital gains for housing user cost calculations.