Why Oregon’s Personal Income Trails the NationFebruary 1, 2017 Oregon’s per capita personal income, the annual sum of all resident income in the state divided by the number of residents, was $43,783 in 2015. That’s 9 percent less than the national figure of $48,112. Oregon’s per capita personal income gap with the nation was generally widening from 1996 until the 2011, and the gap has been a concern of state policy makers and economists. Oregon’s employment situation has improved significantly since then and the PCPI gap has narrowed a bit, but the large gap continues.
Significant causes of Oregon’s low per capita personal income relative to the nation likely include:
- Lower industry wages.
- Lower wages in high-paying occupational groups.
- More part-time workers and a shorter average work week.
- High unemployment rate and low employment-to-population ratio during the recession.
- Lower earnings by proprietors.
- A fast-growing population.
- A net outflow of commuter wages.
Per capita personal income (PCPI) is an annual estimate of average residential income from major sources of income. National, state, and county estimates are created each year by the federal Bureau of Economic Analysis.
Total personal income includes three major components:
- Net earnings by place of residence (examples: wages and salaries, employer contributions to pensions and insurance, proprietors’ income).
- Dividends, interest, and rent (examples: interest income, corporate dividends, rental income).
- Personal current transfer receipts (examples: retirement and Medicare benefits, income maintenance programs, unemployment insurance benefits).
Oregon’s Historical and Current Trends
Oregon’s PCPI has grown over time, but like the nation, Oregon’s PCPI fell as a result of the recent recession before reaching new inflation-adjusted peaks in 2015. Oregon’s PCPI fell to 88.1 percent of the national level in 2011 – the largest gap between Oregon and the U.S. since estimates began in 1929 – and was at 91.0 percent of the national level in 2015.
Oregon’s PCPI was consistently above the national level from 1938 to 1956, when incomes were bolstered by defense manufacturing for World War II and the post-war economic boom. In 1943, war-related manufacturing propelled Oregon’s PCPI to 125 percent of the national level, the highest Oregon’s PCPI has ever been relative to the nation.
In the late 1970s, a booming manufacturing sector, including the important wood products industry, helped return Oregon’s PCPI to above U.S. levels between 1976 and 1979. The boom was relatively short-lived, and the national recessions of the early 1980s were especially tough on Oregon’s economy. Employment in wood products and construction was hit hard, and by 1982 the state’s PCPI fell to just 93 percent of the U.S. level.
After a decade of low PCPI, Oregon was bolstered by employment growth in construction, high-tech manufacturing, and growing trade with Asia. The gap in PCPI between Oregon and the U.S. was at its smallest point in recent years in 1996. Then the Asian financial crisis struck in 1997 and exports to Asia fell. At the same time, some high-paying industries like electronic instrument manufacturing and paper manufacturing began moving significant portions of their operations out of state.
The state’s PCPI growth was slower than the nation’s in 11 out of the 15 years between 1996 and 2011, causing the gap to reach its widest point. Since then, Oregon’s PCPI has been outperforming the nation and the gap is narrowing, but a large gap remains. Three factors seem to be the most significant contributors to Oregon’s gap with the nation: lower earnings, lower proprietor income, and fast population growth.
Explaining Oregon’s Lower Earnings
Net earnings by place of residence make up 60 percent of the “personal income” portion of PCPI. In 2015, Oregon’s per capita net earnings were $26,467, far less than the national average of $30,729. Oregon residents have done similar or slightly better than the nation when it comes to personal income from dividends, interest, and rent and personal current transfer receipts, so the state’s lower earnings have emerged as the major story in the state’s low PCPI.
A significant part of the gap in Oregon’s PCPI relative to the nation is due to industry wages. The majority of Oregon industries pay less than their national counterparts. If national wages could be applied to Oregon’s industry structure, net earnings would rise, and the state’s gap with the nation would close by about 4 percentage points.
Another factor contributing to Oregon’s lower earnings is the pay structure of Oregon’s occupations. Workers in the state’s lower earning occupations tend to be paid more than their national counterparts, and the occupational median wage is slightly above the national median, but wages in Oregon’s higher paying occupations lag behind the nation. For instance, wages for management occupations in Oregon average about 88 percent of the national wage for these occupations. Similar trends hold for life, physical, and social science occupations, computer and mathematical science occupations, and business and financial operations. Lower pay in these high-wage jobs contributes to lower industry wages.
Oregon also has more part-time workers and a shorter average workweek than the nation, two intertwined factors that also contribute to lower earnings. In 2015, Oregon had the fourth highest rate of workers who usually work part time. Three-quarters of part-time workers were part time voluntarily. The other quarter were working part time due to slack work or business conditions, they could only find part-time work, or seasonal decline in demand.
Oregon’s high unemployment rate and many available workers during the Great Recession put downward pressure on wages, leading to lower earnings and lower PCPI. Oregon’s unemployment rate is usually above the national rate, regardless of whether the economy is in recession or expanding. In 2015, Oregon’s average unemployment rate was 5.7 percent, which is close to the nation’s 5.3 percent.
High unemployment in Oregon during the recession also contributed to a lower employment-to-population ratio. So does a higher portion of retirees and a larger share of the population that chooses not to work. Oregon’s lower rate of wage earners in the population negatively impacts PCPI. Oregon historically had a higher employment-to-population ratio than the U.S., but the last couple of years they’ve been about the same. Between 1996 and 2015, Oregon’s ratio declined from 65 percent to 58 percent. The U.S. employment-to-population ratio also declined during this period – from 63 percent in 1996 to 59 percent in 2015.
Lower Proprietors’ Income
Proprietors make up a slightly larger portion of Oregon’s total employment than is true for the nation, but Oregon proprietors earn far less. Oregon proprietors earned just 81 percent of the earnings of their national counterparts. This earnings gap is not new. In all but one of the past 40 years, Oregon proprietors earned less than their national counterparts.
Proprietors’ income includes corporate directors’ fees, income from sole proprietorships, partnerships, and tax-exempt cooperatives. If Oregon proprietors earned the same income as the national average, Oregon’s total personal income would rise, and Oregon’s PCPI gap would narrow by 2 percentage points.
It’s difficult to figure out why Oregon’s proprietors earn less. Part of the difficulty has to do with the estimation of proprietors’ income. More than half of nonfarm sole-proprietors and partnership income is an income misreporting adjustment that tries to account for income that is not reported on tax returns. This is estimated nationally and distributed to states based on net receipts by industry. Other sources of proprietors’ income, such as inventory valuation and capital consumption, are also estimated at the national level and distributed to states based on tax records.
Population Growth: Keeping Up When They Keep on Coming
Population is the “per capita” portion of PCPI, and Oregon’s fast population growth over the past couple of decades, coupled with average or below-average income growth, results in an increasing gap with the nation. Oregon’s population grew at a faster rate than the U.S. since 1996. The state grew 24 percent while the nation grew 19 percent. Because population is the denominator of the PCPI formula, Oregon’s total personal income growth would have needed to grow at a much faster pace than the nation just to maintain the smaller PCPI gap that existed in 1996.
To the extent that people moving to Oregon are young adults early in their careers or retirees without wage income, the in-migrants would put downward pressure on PCPI. Oregon PCPI in recent years may have been a “victim” of the state’s attractiveness, and a resulting population influx, particularly by those without incomes significantly higher than the Oregon average.
The relationship between population growth and economic growth is complex, but an overly simple calculation suggests that if Oregon’s total personal income grew as it did between 1996 and 2015, but the population grew at the same pace as the nation, Oregon’s PCPI gap would be 4 percentage points smaller.
Commuters Lower the Personal Income Measure
As part of the PCPI estimate, the Bureau of Economic Analysis removes the earnings of residents who live in other states and work in Oregon. Their earnings are counted in their state of residence and these commuters have a downward effect on Oregon’s PCPI.
Out-of-state workers took home $3.9 billion in earnings more than Oregonians who work out of state were bringing back into the state in 2015, and these earnings were counted in the commuters’ home state. If the flow of commuter earnings in and out of the state were even, Oregon’s PCPI gap would be about 2 percentage points smaller.
Comparing Oregon to Other States
Oregon, like 29 other states, has a PCPI level below the national PCPI. Oregon has the 30th highest PCPI of the states and D.C. Detailed comparisons with states that outperformed Oregon in PCPI, either by having higher PCPI or experiencing faster PCPI growth, show that in general, states with high or rapidly growing PCPI had:
- Much slower population growth.
- Faster growth in compensation per job.
- Concentration and growth in high-paying industries.
- Lower unemployment rates.
- Fewer part-time workers.
Other Factors Affect Personal Income
Oregon’s PCPI is affected by more factors than those mentioned here, but the relationships may not be as straightforward. A lower cost of living is one factor that is likely related to lower PCPI. A figures published by the Bureau of Economic Analysis suggests that Oregon’s lower cost of living could account for just one-tenth of the state’s gap with the nation.
Other factors, however, were looked at but not found to have much impact on Oregon’s PCPI. These include industry and occupational mix, the high minimum wage, federal government employment and spending, and the unionization rate.
Other factors are sometimes cited as influences on a state’s PCPI level but were beyond the scope of this analysis. These factors include the share of population with higher education, investment in education and infrastructure, and the tax structure. We leave it to experts in these fields to help enlighten Oregonians on the significance of each factor.
More Info on Oregon’s PCPI
A more detailed look at the state’s per capita personal income gap can be found in the full report; Why Oregon Trails the Nation: An analysis of per capita personal income, available online at www.QualityInfo.org