A true cost of living index for Spain using a microeconomic approach and censored data

A true Cost of Living (COL) index measures the expenditure ratio of maintaining a utility level for two price vectors. Its application and empirical testing has been, generally, focalized on a temporal perspective. The aim of this paper is to calculate a spatial COL for the regions of Spain. For this purpose, we will use the microdata from the 2010 Households Budget Survey (EPF, Encuesta de Presupuestos Familiares) provided by the Spanish Statistical Institute (INE, Instituto Nacional de Estadística). We will denominate this index Spatial Cost of Living Index (SCOL). This type of analysis is not usually made by the national statistical agencies and Spain is not an exception. We use a microeconomic approach that keeps the households’ level of utility constant and allows substitution among different baskets of goods across space. The results reveal large differences in SCOL across the Spanish regions. The estimates of the SCOL index allows for reconsidering regional comparisons in terms of average wages. Even when nominal monetary magnitudes for Regional Accounts show great regional disparities, regional differences are largely moderated when the wage figures are corrected by our SCOL.