King's College London

This paper reassesses how estimates of wage inequality from 1997 to 2008 change when regional variations 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). Results show that although regional differences in the cost of living exist, they do not affect significantly the wage difference between workers with a graduate education and workers with a high school degree, and the change of this differential over time, while they affect regional differences in real wage growth. The regional RPI reveals that the national RPI underestimates the cost-of-living of workers in London, and the South East and overestimates the cost-of-living for the majority of the other regions.