This is part 2 of an analysis of costs of living and local purchasing power, in five hundred major cities around the world.
For part one, click here: Primary Drivers of Costs of Living, Worldwide
For part three, click here: Are People in More Expensive Countries Richer?
The data was sourced from Numbeo.com, which hosts user-contributed data - current within the last 18 months.
The IPython Notebook for this project is available on github.
Is there a relationship between cost of living and local purchasing power, in cities around the world?
Note that Local Purchasing Power is a measure that *already* takes into account the cost of living. It is not a measure of absolute wages; rather, it describes the amount of "spending power" a person has, given both:
If wages correlate perfectly to cost of living, then there should be *no* variance in local purchasing power.
If there is no variance in local purchasing power, then it should hold no relationship to cost of living.
(Wages should scale evenly with costs, thus disallowing cost of living from influencing local purchasing power).
We do, in fact, see a low degree of correlation in most regions in the world:
Regions with no or very weak correlation between cost of living and local purchasing power:
And yet, for two regions in the world, there is a very high correlation:
These relationships become immediately clear when we plot local purchasing power vs cost of living:
The blue line in each chart is our regression line, and the light blue bands are our 95% confidence intervals.
We see from these plots that:
Why might this be so?
North America, and Oceana contain only rich countries, which are economically similar. There is a relatively low degree of variance in both income, and cost of living between - or within - these countries. Africa and Latin America are comprised mostly of poorer countries with both low costs of living, and low incomes. While there is definite variance between the cost of living in, say, Chile, and Paraguay, there is still not a tremendous amount of variance between countries.
Generally speaking - and this is only a hypothesis - it may be true that wages and cost of living tend to scale proportionally for cities within a single country, while they do not necessarily scale proportionally between countries. Europe and Asia - more so than any other regions - are both home to economies with a huge amount of variance between countries.
Plotting the data in Tableau, this becomes quite clear:
In Europe, we see a very strong correlation between size and color.
Next up - Part Three: "The World Through Whose Eyes?" - Costs of living around the world, relative to your country of residence.