Sunday, July 02, 2006

What Drives the Regional Economy? Follow the Money... (Part 1)

Most discussions about the Pittsburgh Region’s economy focus on changes in employment, businesses, or population. But jobs and people per se don’t drive the regional economy, money does – money in the form of personal income.

The Pittsburgh Region ranks well in terms of per capita personal income. In 2004 (the most recent year available), we had the 53rd highest per capita personal income among the 361 metro areas in the country, and we ranked 22nd among the largest 40 regions. If the numbers were adjusted for cost of living differences among regions, our ranking would be even higher.

But what are the sources of this income?

When most people think of “personal income” they think of salaries and wages from jobs. But only 66% of the Pittsburgh Region’s personal income comes from employment earnings – one of the smallest portions of any of the top 40 metro areas in the country. Another 15% comes from dividends, interest, and rent, which is about average among other regions.

The final contributor to income is “transfer payments” – primarily Social Security, Medicare, and Medicaid benefits. This is where southwestern Pennsylvania is unique. Nearly $1 out of every $5 in the Pittsburgh Region’s economy each year comes from transfer payments, the highest percentage among the top 40 regions.

By comparison, regions such as Atlanta, Austin, Dallas, Denver, Houston, and San Francisco get only 8-9% of their income from transfer payments. If you didn’t count transfer payments, Pittsburgh’s per capita income ranking among the top 40 regions would drop from 22nd to 32nd.

The reason for the high level of transfer payments is simple – a larger proportion of southwestern Pennsylvanians are retired or elderly than in almost any region in the country. The seniors on Social Security spend much of that income here, and because we have a strong network of hospitals and long-term care, their Medicare and Medicaid benefits are spent here, too.

The large amount of Medicare and Medicaid dollars coming into the region has helped to fuel the growth of the region’s health care and social services sector, which is now the region’s largest employer. And because the jobs in health care are relatively well-paid, this sector contributes over 12% of the region’s employment-generated income, the 3rd highest percentage among the top 40 regions.

What does this mean for the region’s economy?

• Far from being a drain on the economy, senior citizens, and the income they receive (not just from retirement and medical benefits, but also from employment and interest earnings), support a lot of jobs. Moreover, their benefits grow even during recessions, helping to offset the impact of job losses in other sectors. Although we need more young people to start and staff new businesses, our seniors are important, too. (For additional information on the impact of seniors on the region's economy and how that may change in the future, see the work that Chris Briem at the University of Pittsburgh has done, including the 1999 report on The Economic Impact of the Elderly in Allegheny County, and Chris's January 2, 2000 Post-Gazette Op-Ed "We're Getting Younger Every Year.")

• The health care industry is a major source of jobs and regional wealth, and also is the foundation for a regional biotechnology industry. Changes in federal and state policies on Medicare and Medicaid need to be monitored closely, since they could have a significant impact on the health care industry and the region’s economy. (As noted in previous posts, the health care industry has been the leading generator of jobs in the Pittsburgh Region over the past 6 years.)


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