Economix Blog: What Makes Manhattan Cost So Much

CATHERINE RAMPELL

Dollars to doughnuts.

You’ve probably heard the stat before: The cost of living is twice as high in New York as it is in the rest of the country. In the Council for Community and Economic Research’s latest cost of living report, we find out exactly what that means, and what the biggest distortions are.

The council collects price data from 307 urban areas. It found that for the first three quarters of 2012, the after-tax cost for a professional/managerial standard of living in Manhattan was 225.4 percent of that for the nation. That made Manhattan once again the most expensive place to live. In second place was Brooklyn (178.6 percent of the national average), followed by Honolulu (167 percent), San Francisco (163.4 percent) and San Jose, Calif. (153.4 percent).

By far, the biggest culprit in driving up Manhattan’s cost of living was housing. The organization’s index of housing costs is 455.2 percent of the national average. The other cost of living categories were also higher in Manhattan than in the rest of the country, by the cost differential was not nearly as great.

Here is a selection of the average price data from some of the 60 specific categories they track:

As with any cost-of-living index, the comparisons are imperfect. For example, some of the items that the Council for Community and Economic Research includes in its index are much pricier in Manhattan than elsewhere, but probably don’t enter Manhattanites’ daily expenses too frequently — things like tennis balls, bowling or even gasoline.

There’s another major issue when comparing costs of living in different cities: a lot of the amenities of various cities are not captured by the prices of individual goods. Stores and restaurants are open later in New York, for example. There are probably more top-notch restaurants in Manhattan than just about anywhere else in the United States. These amenities might push other prices (like rents, or for that matter goods sold in stores that have to pay high rents) higher, so that it’s not a true apples-to-apples comparison to look at prices in Manhattan against those in Buffalo or Toledo. Economists disagree about how to adjust for these factors when calculating cost-of-living comparisons.

One new paper by Rebecca Diamond (a Harvard Ph.D. student who is one of the stars on this year’s economic job market) tries to take into account the value of these hidden higher amenities. Her research suggests that when you weigh rising amenities against rising costs in some of the highest-skilled cities in America, it actually turns out that higher-skilled people who have access to these better amenities have an even better standard of living than the standard cost-of-living adjustment would show. She also finds that welfare inequality between higher-skilled and lower-skilled workers is greater than the already-wide wage gap alone suggests.

Another recent paper (by Jessie Handbury of Wharton) also tries to take the relative tastes of rich versus poor people into account. It finds that New York is indeed an expensive place to live if you’re poor, but in a way is actually a relatively cheap place to live if you’re rich and have standard rich-person tastes (e.g., Whole Foods might be the only place in town for to buy organic free-range chicken in a place like Little Rock, Ark., whereas there’s more price competition for high-end food in New York).

One final note: The pricing figures from the Council for Community and Economic Research are different from those in the Consumer Price Index reported by the Bureau of Labor Statistics. The bureau’s monthly report reflects spending patterns for all urban consumers and for urban wage earners and clerical workers, and has data from only a couple of dozen broad metropolitan areas (as opposed to the 307 geographically narrower urban areas).

Article source: http://economix.blogs.nytimes.com/2013/02/15/what-makes-manhattan-cost-so-much/?partner=rss&emc=rss