IU Public Policy Institute examines income gap between Indiana, U.S.
Indiana trails the nation and the Midwest in the important category of per-capita personal income, according to a new policy brief from the Indiana University Public Policy Institute.
The report analyzes the numbers and finds the gap between Indiana and the nation is significant and won't easily be reversed. The state is behind not only in wages and salaries but also in investment income and income from proprietorships.
"Moving Indiana's per capita personal income closer to the national level will therefore be a long, slow process," writes IU Professor John Ottensmannn, the report's author. "Increases in the wage and salary income per employee are the key. But higher wages and salaries will be needed for extended periods to allow the building of the wealth required to increase dividends, interest and rent income."
Ottensmann is a professor in the School of Public and Environmental Affairs at Indiana University-Purdue University Indianapolis and director of urban policy and planning for the Center for Urban Policy and the Environment, part of the IU Public Policy Institute. The policy brief is the latest installment in Policy Choices for Indiana's Future, a process undertaken by the Public Policy Institute to develop recommendations for major policy makers in the state's public, private and nonprofit sectors.
The report starts by looking at trends over time and identifying when the gap between Indiana and the nation emerged. It examines the various types of income that are counted in per capita income and considers the contributions of each type to Indiana's income gap.
Indiana's per capita personal income in 2010 was $34,943 -- 14 percent less than the national per capita income of $40,584 and quite a bit less than the figure of $38,604 for the Midwestern states, which include Indiana along with Ohio, Michigan, Illinois, Wisconsin, Minnesota and Iowa.
That's a significant change from the situation 40 years ago. In 1970, the report shows, Indiana's per capita personal income was only 7 percent less than the national average. And per capita income for the Midwest was actually higher in 1970 than the U.S. figure. But an income gap opened between Indiana and the nation in the recession years of the early 1980s. And it grew wider in the past decade, when real per capita income remained flat in Indiana while it increased somewhat across the nation.
Ottensmann explains that four types of income are included in federal per capita income calculations, with the total state income divided by the state's population to arrive at per capita income:
- Wage and salary income, including employer contributions to health and life insurance and to retirement plans
- Proprietors' income, including income for business owners, self-employed professionals, investors in partnerships and many farmers
- Dividends, interest and rent, including income received by retirement funds on behalf of individuals and "imputed" rental values of owner-occupied homes
- Personal current transfer receipts, including payments from Social Security, government healthcare programs, unemployment compensation and public assistance.
The analysis shows that Indiana has fallen behind the nation in every category except the last.
In 1970, the report says, wage and salary income per employee in Indiana was almost exactly the national average. But in 2009, the last year for which figures were available, the average worker in Indiana received $44,613 in pay and benefits -- 12 percent less than the nationwide figures of $50,725.
Income from dividends, interest and rent also contributes significantly to the gap. The report considers whether Indiana's low housing values increase the gap by depressing rental income, including imputed rents. It finds, however, that low housing values account for only a tiny percentage of the difference.
Indiana has consistently trailed the nation in proprietors' income, although the gap has varied in size. It grew larger as business incomes rose in the 1990s but shrank in recent years as per capita income from proprietorships declined sharply across the country.
If there's any consolation for Hoosiers, it's that the state's low cost of living may reduce the hardship caused by low per capita income. Adjusting with estimates from the Missouri Economic Research Center, Ottensmann finds Indiana's cost of living is 90 percent as high as the national average -- not far out of line with its per capita income of 86 percent the national average.
"These data are only estimates," he writes, "but this does suggest that the difference in the cost of living in Indiana could be a significant share of the gap in per capita personal income."
The full report can be downloaded at http://policyinstitute.iu.edu/PolicyChoices/publicationDetail.aspx?publicationID=673.