Economic Bulletin - January 2002
Nominal wages (i.e., not adjusted for cost of living) are higher in San Diego than average U.S. urban wages;
Living costs are higher in San Diego than the average U.S. urban areas;
Urban coastal areas to the north (e.g. San Francisco) have higher living costs than San Diego;
Real wages (i.e., adjusted for the cost of living) are lower in San Diego than in the rest of the nation, but higher than in the greater Los Angeles area and the San Francisco Bay Area;
Wages increased significantly from 1999 to 2000, but with the exception of blue collar occupations, wage increases were less than the regional rate of inflation.
Wages vary by occupation, not industry
Americans often worry that good jobs are losing out to bad jobs, that high paying manufacturing jobs are being replaced by low wage, service sector jobs. While it is usually true that workers take large pay cuts when they are forced to change industries, it is also true that a persons wages are mostly determined by their skills and occupation, not by their industry. Fast food corporations may hire a lot of unskilled workers, but they also hire computer programmers, lawyers, executives, and so forth.
Table 1 makes this point. Executives and janitors work in the same industry, but the former make a higher wage due to the complexity and skill requirements of their work. At the same time, executives in manufacturing do not necessarily make more than executives in the fast food industry or some other service oriented sector. Table 1 lists the average San Diego wage during 2000 for 15 occupational categories. Wages include hourly earnings and salaries paid to employees, including incentive bonuses, cost of living adjustments, and hazard duty pay. They do not include overtime pay, or benefits. Each of the 15 categories in Table 1 is an average of many subcategories, with 480 occupational subcategories measured in total.
Table 2 shrinks the number of categories in order to show a comparison of three major California urban areas and the United States urban average. Table 2 shows that California urban areas have higher wages than the average US urban area, and that San Diego is similar to the Los Angeles-Orange County-Riverside County region, but below San Francisco-Oakland-San Jose.
Judging by Table 2, workers in San Diego receive higher than (U.S.) average wages, but common sense tells us that money wages are only part of the story. Looking at similar paying jobs across regions, differences in living costs can dramatically alter the basket of goods and services one can buy. For example, within California, the cost of living varies greatly across cities (Table 3). In Fresno or Riverside, living costs are about 6% higher than in a sample of over 300 U.S. urban areas, while in San Francisco, they are almost 100% higher. Living costs in San Diego are estimated to be about 27% higher than the national average.
The living cost comparisons of Table 3 can be used to estimate price adjusted real wages in major California and average United States urban areas. Table 4 deflates California wages by the weighted average of the living costs in the combined metropolitan areas (LA-Orange-Riverside, and SF-Oakland-San Jose). It shows that real wages in San Diego are above the other major metropolitan areas of California, but below the U.S. urban average. Apparently, there is a wage penalty to working in San Diego, but it is less severe than in other areas of the state.
The wage penalty is most severe for service sector workers (22% less), followed by blue collar workers (20%) and white collar workers (10%). Overall, for all occupational categories combined, the San Diego discount is over 11%. This is a lot, but considerably less than the LA discount (23%) or the San Francisco Bay Area discount (19.5%).
Do wage differences compensate for regional amenities?
Some economists argue that after wages are adjusted for the local cost of living, the wage difference between regions reflects the value of environmental and social amenities. That is, if San Diegos cost-of-living-adjusted wages are below the national average, its because it is such a wonderful place to live. As more and more people crowd into the region, wages fall and living costs rise (due to congestion) until the advantages of local amenities no longer compensate for the lower wages and higher costs.
If we compare the real wages in Table 4 to a much poorer region of the countrysay Brownsville on the Texas-Mexico borderwe discover that real, cost-of-living adjusted wages are lower there. According to the above theory of wage differentials, Brownsville must have more amenities than San Francisco which must have more than San Diego. This is nonsensical, however, and is probably explained by the mismeasurement of wages. Specifically, within a given occupational category, the complexities and skill levels of Brownsville occupations are probably somewhat less than in San Diego or San Francisco.
Strong wage gains offset by cost-of-living increases
San Diego has experienced four years of an extraordinarily strong labor market, with unemployment rates well below 4% and at times below 3%. The net result was a labor shortage that pushed up wages rapidly, particularly in the last year (1999-2000). Higher wages coupled with the influx of new residents contributed to a strong growth in expenditures, but the supply of goods and services was somewhat sluggish, particularly for goods such as new housing. As a consequence, local price increases were nearly as great as the wage increases.
Table 5 illustrates the wage and price increases in San Diego between 1999 and 2000. By definition, real wages increases are equal to the difference between the nominal wage increase (6.77%) and inflation (5.79%). In other words, average wages rose about 1%. The real wage increase was not uniform across occupational categories, however, with blue collar workers making significant gains and white collar workers losing ground in spite of nearly a 5% average wage increase.
In sum, San Diegos wage discount is real, although it is a general problem within the coastal areas of California, and not just a local fact of life. The discount is created through rising regional costs, in part propelled by the limited supply of housing and other goods and services which cannot keep up with growing regional demands.