Saturday, June 30, 2007

Per Capita Income Growth Hides Serious Economic Weakness

The Pittsburgh Region had the 4th fastest growth in per capita income among the top 40 regions over the past 20 years (1985-2005), and the 9th fastest growth rate between 2000 and 2005. That’s a sign of economic strength, right?

Not necessarily. A common fallacy is that high and growing per capita income means that jobs are well-paid and that average wages are increasing faster than other regions. But that isn’t always true. In fact, the Pittsburgh Region had the 9th lowest average wage per job among the top 40 regions in 2005 and it had the 5th slowest growth in average wages over the past 20 years.

How can our per capita income be growing so rapidly when wages are growing so slowly?

The reasons lie in the way per capita income is calculated.

First, the “income” in the numerator is more than just wages and salaries. It also includes two other factors – (1) dividends, interest, and rent, and (2) transfer payments, primarily Social Security, Medicare, and Medicaid benefits. Thanks to our large population of senior citizens, nearly one out of every five dollars in the Pittsburgh Region’s economy comes from transfer payments, a higher share than any region in the country other than New Orleans. And that percentage has grown over the past five years (from 16.9% in 2000 to 19.0% in 2005). Social Security benefits increase every year with inflation, even when wages and salaries don’t, and Social Security recipients don’t get laid off the way workers do.

So our above-average level of transfer payments in the Pittsburgh Region increases our per capita income ranking over what it would be otherwise. For example, Pittsburgh has higher per capita income than either Columbus, Ohio or Portland, Oregon. But its employment earnings per capita are lower than either of those two regions. The reason is that transfer payments per capita in Pittsburgh are 50% higher, thanks to our larger population of senior citizens.

But the primary reason our per capita income has been growing faster than other regions is that the denominator is the total population, not wage earners or even income recipients. To understand the importance of this, imagine a married couple, both of whom work and earn a total of $60,000 per year. The “per capita income” of their household is $30,000 ($60,000 divided by 2 people). If they have a baby, their per capita income instantaneously drops by 33% to $20,000, because the same income is now spread across three people, rather than just two. Conversely, if their child were 18 years old and moved out, their household per capita income would increase by 50% (from $20,000 back to $30,000).

The same thing happens within and across regions. Everything else being equal, regions with fewer children will have higher per capita income, and regions with an increase in the number of children will have slower growth in per capita income (because the children increase the denominator -- population -- without increasing the numerator -- income). The Pittsburgh Region has had one of the lowest birth rates in the country (which is one of the reasons that we have been losing population), which means that other regions have added children at a faster rate than we have. That has decreased their per capita income growth over what it would be otherwise, and has boosted our ranking on per capita income growth relative to them.

Another way to see this is to compare the ratio of employment to population. The higher the ratio, the fewer non-wage-earning people there are in the economy, so all else being equal, a higher ratio results in a higher per capita income. An increase in the ratio means that there are fewer non-wage-earning people to spread wages across. In fact, Pittsburgh had the highest growth in the ratio of employment to population of any of the top 40 regions between 1985-2005. That's likely a combination of spouses entering the workforce during the 1980s and 1990s, and a very low birth rate more recently, but whatever the cause, it helps explain why our per capita income went up so much even though our wage rates didn't.

In summary, even though the Pittsburgh Region had the third slowest growth in total income between 1985 and 2005, our per capita income grew faster than most other regions during that period because we also had the largest loss of population of any region in the country. The same was true between 2000 and 2005 -- even though we had the 10th slowest growth in total income, we had the largest loss of population, so we jumped up to the 9th fastest growth in per capita income.

The bottom line is that per capita income growth is not a good measure of how attractive our economy is to workers and potential residents. The right measures are the growth in jobs and the average wages per job. And on those measures, we’re not doing well at all – we had the 4th worst rate of job creation among the top 40 regions over the past three years and we have the 9th lowest pay per job.

Clearly, encouraging more high-wage job creation needs to be a top priority for the region. As noted previously, a key part of the solution is to reduce Pennsylvania’s uncompetitive business taxes, which will encourage existing businesses to grow and help attract new businesses to the region.


Anonymous Anonymous said...

Harold, you write, "... per capita income growth is not a good measure of how attractive our economy is to workers and potential residents."

This is true. To measure how "how attractive" your "economy is to workers and potential residents" you need to measure Changes to Net Head Count for adults between 16 and 64.

Perhaps you meant to write "how attractive our region is to investors whose invested cash creates jobs".

You can measure this by counting up Changes to Savings used as Reserves for loans to New Business and Changes to Net Direct Investment.

Average wages per job tells you nothing. The average could be $150/hr. Yet, each worker could only work one hour a week.

Harold, you write, "...we have the 9th lowest pay per job."

In truth, folks in Pittsburgh do not make the things the rest of the world is willing to trade their work to buy.

When folks in Pittsburgh can make the stuff the rest of the world wants, folks of Pittsburgh can export their stuff quicker than they import stuff. As long as the workers are productive in this, wages will rise as net cash inflow will have investors bidding up wages.

Note, export here means to exporting to residents of other states and to the world. The same goes for importing.

Your region will not see a net increase in jobs unless a net increase in savings and direct business credit rises, which entrepreneurs use to bet on new ideas.

Remember, governments can never create productive jobs. Politicians can create bureaucracies only. Paper shuffling is not productive. Paper shuffling bureaucrats leech off the backs of taxpayers.

12:39 PM  

Post a Comment

<< Home