The truth about cost of living in Indiana; it’s not that bad

No topic generates more email for me than the persistent belief of readers that wages in Indiana are low because the cost of living is low. I argue that income determines local housing prices and hence the costs of living given that housing represents 15.6 percent of consumer spending, exceeded only by health care’s 16.8 percent.

How low is the cost of living in Indiana? If the nation’s cost of living is considered as 100, Indiana comes in at 91.4, tied with Louisiana for 36th place among the states and the District of Columbia.

That’s just 8.6 percent below the national average. These are U.S. Bureau of Economic Analysis data for 2014, which is the latest available.

The highest costs of living are found in the District of Columbia (118.1), followed by Hawaii, New York and New Jersey. The lowest costs are “enjoyed” by residents of Mississippi, Arkansas and Alabama.

What is the biggest difference between D.C. and Mississippi? Why is there a spread between them of 31.4 points on this scale of prices? The answer is simple: it’s the price of housing.

In D.C., housing services (rented and owner-occupied) come in at 162.5 followed by Hawaii and California. Indiana ranks 39th in housing costs at 75.4 and Mississippi is 50th at 63.2, with Arkansas lowest at 62.5.

Of America’s 381 metro areas, only 15 include Indiana counties.

The Chicago metro area at 106.0, which includes four northwest Indiana counties, is the only “Indiana” metro above the U.S. average. Bloomington (94.9), Lafayette (93.9) and Indianapolis (93.4) follow. Michigan City-La Porte ranks lowest in Indiana at 85.9 (352nd in the U.S.), behind Kokomo, Columbus and Terre Haute. (Columbus and Kokomo in this group may be a function of commuting patterns.)

Again, housing services are the deciding factor. The Chicago metro area (39th in the nation) scores at 116.6, well below San Jose’s 200.7 and other California cities which dominate the list of metros with high-cost housing.

Several factors determine the cost of housing, including:

Limited building space (oceans, lakes, mountains, polluted sites)

Zoning restrictions on density (minimum acreage requirements, limits on building heights)

Historic, environmental and sentimental regulations

Household formation rates

Household income.

How did you decide where to live? Wasn’t it determined largely by your ability to pay the rent or meet the mortgage payment? The more money available to households, the greater the choices of housing open to them. The more households with high incomes, the more landlords and developers can charge, the larger the dwelling units, the more amenities provided. Income is the driving force.

Employers will tell job applicants, “You’ll find your salary goes further in Evansville where housing costs are 39 percent below Chicago’s.” But the truth begins with the fact that Evansville’s average compensation is 26 percent below Chicago’s.

Morton Marcus is an economist, formerly with the Indiana University Kelley School of Business. Send comments to dr-editorial@greenfieldreporter.com.