How do regional price levels affect income inequality? Household-level evidence from countries worldwide

Abstract Regional differences in price levels are substantial in many countries, but little is known about how they affect the measurement of income inequality and poverty. To bridge this gap, we construct a new regional price level database which combines indices published by official authorities, previous literature, and our original estimates. The database covers 23 countries including the world’s seven biggest economies. The combination of these indices with household-level data from the Luxembourg Income Study allows us to assess changes in indicators of income inequality and relative poverty caused by the adjustment of income for within-country price level differences. Our findings point to the necessity of considering the properties of specific indicators while assessing the potential effects of regional price levels.