OLMIS

by Nick Beleiciks
Published May-21-2008

Introduction Consider Population Change The People’s Portfolio Net Earnings Drive Oregon’s Income Growth Personal Income Trends in Other States

If you are like most people, you probably make money from a variety of sources. You probably earn most of your money the same way other folks do, by working for it. Of course many people get some portion of their spending money from interest earned on savings and investments as well. Then at some point in life, nearly everyone receives money from a government or private social insurance program. When these sources of money are combined, the total is referred to as personal income.

Personal income is an important indicator of a region's economic health because it tells us how much money is available for people to spend or save without having to borrow money or sell their assets. Personal income is often reported taking the population of an area into account – resulting in per capita personal income (PCPI), which is the average personal income of the residents in a region.

The Bureau of Economic Analysis (BEA), the section of the U.S. Department of Commerce that tracks personal income, recently released 2007 figures for PCPI in the states. According to the report, Oregon's per capita income grew 4.5 percent from 2006 to 2007 to $34,784. The nation's PCPI grew slightly faster at 5.2 percent, reaching $38,611. This divergence in growth rates caused Oregon's PCPI level to drop down to 90 percent of the national level, a record low.

The lagging nature of Oregon's per capital income is nothing new, as Graph 1 shows. Since the late 1960s, Oregon's PCPI spent more time below the national PCPI than above it. In recent years, the level of divergence increased. In fact, the $3,800 difference in income last year was more than triple the inflation-adjusted difference of $1,100 back in 1997, right before Oregon's PCPI began the latest downward trend relative to the rest of the nation.

The BEA calculates the per capita personal income of a region by dividing total personal income by the total population of the region. The population includes everyone, whether or not they receive income. Since population is the denominator in the PCPI equation, PCPI will decline whenever the population of a region is growing at a faster rate than the personal income level of the region. Similarly, a region where income grows at a faster rate than the population will see PCPI increase.

The 6.1-percent growth in total personal income in Oregon was about the same as the United State's 6.2-percent growth between 2006 and 2007. At the same time, Oregon's population grew 50 percent faster than the nation as a whole. Oregon's fast population growth, coupled with average or below average income growth provides the bare-bones explanation of why Oregon has been having difficulty keeping up with the nation's increase in PCPI.

This story has not changed much over the past decade. The population of Oregon increased 13.4 percent since 1997 while the population of the United States increased only 10.6 percent. Over the same period, total personal income in Oregon increased 25 percent after adjusting for inflation, much slower than the national increase in total personal income of 31 percent.

To help understand what exactly personal income measures, it helps to look at the individual components. There are three sources of personal income as measured by the BEA: net earnings from work, income from investments, and transfers receipts.

Net earnings are the wages and salaries that employees and self-employed individuals receive from work, minus the required payments to government social insurance programs such as Social Security and unemployment insurance. The net earnings component is also adjusted for commuters. It includes wages and salaries that all Oregonians earn regardless of where they work, and excludes earnings of out-of-state residents who work here.

Investment income is from corporate dividends, interest earned from savings, and income from rent. Income from rent covers income earned by individuals with rental properties where rental income is not the individual's primary source of income. Rental income also includes the rental value of owner-occupied residences, as well as the royalty income received from patents, copyrights, and natural resources.

Transfer receipts cover the money that governments and corporations give to individuals or non-profit institutions. Examples of government transfer payments include Medicare and Medicaid payments, veterans benefits, and federal grants for student aid. Corporate transfer payment examples include liability payments for personal injury and corporate gifts to non-profits.

Net earnings currently account for about 65 percent of Oregon's personal income, followed by investment income at 20 percent, and transfer receipts at 15 percent. Graph 2 shows how the shares of the income sources that make up personal income in

Oregon have changed little over the past decade. Earnings and transfer payments have become a slightly larger component of PCPI, while the share of investment income slightly decreased. The current Oregon PCPI breakout by components is similar to the national personal income breakout of 68 percent net earnings, 17 percent investment income, and 15 percent transfer receipts.

Net earnings were responsible for 57 percent of Oregon's growth in personal income last year, while investment income contributed 25 percent of the growth and transfer receipts brought in the remaining 18 percent. These shares of growth were similar to the rest of the nation.

Total earnings, the gross wages and income earned by Oregon employees and proprietors, increased nearly 5 percent in 2007. Earnings in the health care and social assistance industry were responsible for 14 percent of the total earnings gain, the most from any industry. Professional and technical services was the runner-up industry at 11 percent of total earnings growth, followed by wholesale trade with 9 percent. Total earnings in the United States increased less at just over 4 percent. The big contributors nationally were professional and technical services with 15 percent, health care and social assistance with 12 percent, and finance and insurance with 10 percent of total earnings growth.

Oregon's per capita personal income is lower than in most states. In 2007, The Beaver State ranked 30^th with a PCPI of $34,784, and 38th for its PCPI growth rate of 4.5 percent. Connecticut had the highest PCPI at $54,117, followed by New Jersey at $49,194 and Massachusetts at $49,082. The lowest state PCPI was in Mississippi, at $28,845. States with the fastest PCPI growth since 2006 were Louisiana at 9.2 percent, New York at 7.6 percent, and Mississippi at 6.7 percent. Arizona had the slowest annual PCPI growth rate at 3.4 percent.

Table 1 shows PCPI and recent growth rates for Oregon and its neighbors. In our neighborhood, California and Nevada had the highest PCPIs, while Oregon sat between Washington and Idaho. Of these states, Washington's 5.8 percent growth was the only rate to beat the national PCPI growth of 5.2 percent.

The growth in total earnings in California and Washington was led by the professional and technical services industry. Like Oregon, Idaho's total earnings growth leader was the health care and social assistance industry. Nevada's accommodation and food services industry, which includes hotel casinos, was the state's largest driver of earnings growth last year.