Read income data carefully

Over the past 12 months, North Carolina has experienced faster income growth than the rest of the country, regardless of whether the measure is average income per person or median income by household.

But this bit of good news for our state comes after years of falling short. Since the turn of the 21st century, average annual income growth in North Carolina has averaged 2.5 percent, below the national average of 3 percent. During the 1980s and 1990s, we usually outperformed the national and regional averages on such measures.

What has changed? Some politicians and activists blame the passage of the North American Free Trade Agreement (NAFTA) and other trade deals that heightened competitive pressure on the state’s traditional textile and furniture industries, as well as social and legal trends working against the state’s tobacco-manufacturing sector. Others say North Carolina failed to keep pace with tax and regulatory reforms enacted by competing states and nations, or failed to spend enough on roads and schools, or got distracted by other matters and didn’t devote enough attention to fostering new businesses or recruiting existing ones.

These are fascinating questions. Some match up better to the available evidence than others, in my opinion, but that’s a discussion for a later day.

What I’d like to explore here is that changes in state-by-state income statistics are not always what they appear to be. Remember that these are fractions with numerators and denominators. The numerator is personal income. The denominator is either the number of persons or the number of households.

Unless you consider such factors as population flows and household formation, you can easily be misled by the official income statistics. For example, consider a Mexican laborer who immigrates north (legally or illegally) to find work. If he arrives in North Carolina and takes a job harvesting produce, his income will be modest by state standards, slightly pulling down the state average. But he will himself likely experience a very large increase in his income. That’s why he came to North Carolina in the first place.

Similarly, because people in their 20s and 30s tend to earn less than people in the 40s and 50s, an inflow of young people can be both a sign of economic vitality and a factor that pulls down the area’s average or median incomes, at least in the short run.

Now consider how changes in family structure affect the measurement of household income. Say a married North Carolina couple earning a combined $50,000 in annual income decides to divorce. Their combined income may remain $50,000, but now there are two households instead of one. This will tug down the state’s household income statistic (but not the per-capita income statistic).

Perhaps one reason why North Carolina income trends began to turn south at the end of the 20th century was that young Americans as well as immigrants from south of the border were making up an increasing share of our population inflow than in the 1970s, 1980s, and early 1990s. The personal incomes of these new North Carolinians were rising. But their arrival pulled down the state’s average.

There is some empirical evidence for this kind of effect. Several recent studies have found that states with high proportions of foreign-born immigrants have greater levels of income inequality, both because the immigrants in question have below-average incomes and because of downward pressure on wages in some occupations. And in a paper published in the Journal of Regional Analysis & Policy, UNC-Charlotte scholars John Connaughton and Carolina Swartz found that a high rate of population growth tends to reduce a state’s national ranking in per-capita income, likely because of the higher proportion of young people and recent immigrants.

The effect couldn’t possible be responsible for the whole phenomenon of North Carolina falling behind in income growth since the turn of the century. There are clearly major economic and policy factors at play. But to craft effective solutions requires a clear understanding of what’s really going on, and why.

John Locke Foundation chairman John Hood is the author of Catalyst: Jim Martin and the Rise of North Carolina Republicans.
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