Abstract
Price levels affect real incomes across countries and regions. We compare real incomes of workers and pensioners across 14 regions of the Czech Republic.
We find that taking into account regional differences in price levels compresses the income differences between regions for private sector employees, but increases them for pensioners and some groups of public-sector employees. This result is strengthened when we employ microeconomic data to reflect the education, occupations, age and gender of workers.
Private-sector wages in Prague are 43% higher than in the rest of the country, but one half of this difference can be explained by Prague's higher price level and the other half by workers' characteristics. When we take these two factors into account, public-sector wages and pensions are the lowest in Prague.
We discuss the benefits and costs of the government reflecting the regional price levels in setting public-sector wages or pensions.