Real Wages, Wage Inequality and the Regional Cost-of-living in the UK

University graduates in the UK are more concentrated in regions where the cost of housing is higher than other groups. This implies that many graduates face a higher cost-of-living that could possibly reduce the graduate real wage relative to other groups and carry implications for measures of wage dispersion. This paper aims to reassess how estimates of wage inequality from 1997 to 2008 vary when regional differences in the cost of housing in the UK are taken into consideration. In order to do so, the real wage is deflated by a specially constructed regional Retail Price Index (RPI); this is a new measure of the cost-of-living that partially updates the national RPI with a regional housing index, therefore allowing the RPI to vary by regions. Results show that the national RPI underestimates the cost-of-living of workers living in the most expensive regions (London, South East) and overestimates the cost-of-living for “cheaper” regions (Northern Ireland, Scotland). When deflating hourly wages by the regional RPI, the average level of wages is lower from 8% to 11% an hour for all workers in London and the South East, but is higher (from 2% to 9%) in the remaining regions; similarly wage inequality is lower when deflating by the real regional RPI.