Thursday, July 24, 2014

An Alternate Look at Utah’s Per Capita Personal Income

Mark Knold, Supervising Economist

In listings of the 50 states, Utah consistently ranks near the bottom in yearly per capita personal income. The knee-jerk conclusion is that Utah has low wages, or that what you can earn in Utah is muted. But is that a fair perception? What Utah’s per capita measure needs is a more transparent look.

Quickly we’ll define some terms. Personal income is the total income earned throughout Utah in a given year. In all states, the most prevalent way to generate income is through earnings from a job. But income can also come from retirement payments, dividends from investments, rental income, unemployment benefits, social security payments, or selling other assets (to pawnshops and on eBay, among others). It is the total extent of income amassed by Utah residents. Per capita is to take that total income and divide it by Utah’s total population. That brings it down to an individualized level that can be compared to other states. But what if you have the highest proportion of children in your population than any other state, as Utah does? Children generally don’t earn income. That is naturally going to lower your per capita calculation in relation to other states.

Generally, people 18 and over are the ones who generate a state’s total income, so let’s divide each state’s total income by the 18-and-over population. That way, we are only including the population segment that contributes to total income. Adjusting for age noticeably improves the picture for Utah.

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The image to the right has two graphs: the graph on the left highlights Utah’s position within the total-population per capita ranking in yellow; the graph on the right readjusts Utah’s position with just the 18-and-over population. Utah noticeably moves up in the rankings. In fact, Utah’s 45% increase between its general per capita value ($36,274) and its 18-and-over value ($52,501) is the largest percentage gain for any state. The more children you remove from the equation’s denominator, the more gain in per capita value.

That is not the end of the story. One could do an additional adjustment for the cost-of-living variations across states. Applying cost-of-living indices from this site and adjusting each state’s 18-and-over per capita accordingly, Utah advances even further, now finding itself in the middle of the pack.
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With the elimination of the non-income group (those below 18) and an additional adjustment for the various costs of living in each state, the story of Utah’s per capita income is brought into better proportion.

Even then, it is possible to add one more caveat. If you were to fill a room with a random sample of 30 year olds, and another equal-size room with a random sample of 50 year olds and calculate in each room the per capita income, which room would you expect to have the higher income? Due to 20 more years of work experience and earnings power, you should expect the 50-year-old room to have the higher income. That comparison is analogous to what you get when you compare Utah to the national average (which means most other states). The graph below shows that Utah has a higher percentage of its income-earning age at the younger end of the spectrum than does the nation as a whole. If it were possible to further adjust state incomes by age of income earners, Utah would probably inch up even more.

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Utah’s per capita income measure is cited regularly. Yet without a proper understanding of that variables’ nature and Utah’s unique underlying characteristics, a mistaken inference is often forthcoming.

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