In my previous blog, I showed how per capita and per household income varied between Maine and New Hampshire. However, some folks may try to dismiss this as one special case where using per household income makes a difference to the analysis that a larger private sector share of personal income means greater economic prosperity in the long-run.
So, the charts below show a scatter-plot of the relationship between the private sector and income under the per capita metric (chart 1) and per household metric (chart 2) for all the 48 lower states. In both charts, Alaska and Hawaii are excluded from the observations.
The first thing to note is that the r-squared is higher under the per household metric (0.52) versus (0.46). The r-squared measures how closely the observations conform to the predicted line as measured in the equation shown. Even just eye-balling the chart you can see that in chart 2 the observations are more tightly clustered. And Utah, the state that started this saga, has clearly moved from an outlier in chart 1 to middle-of-the-pack in chart 2.
Secondly, the correlation is even steeper under the per household metric which means an even greater drop/increase in income with a smaller/bigger private sector. On average, a 1 percentage point decrease/increase in the size of the private sector yields a decrease/increase in household income of $2,617. That’s a nice chunk of change.
In conclusion, switching from per capita personal income to per household personal income (which holds constant the differences in household size) brings to light more of the impact of the private sector on long-run economic growth. For a practical application , here is an op-ed I recently published in New Mexico showing how their bloated government workforce, which is crowding-out their private sector, is costing the residents in terms of lost economic potential.
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