For state-to-state comparisons, per capita personal income is the standard-bearer. Its simple to calculate and simple to understand; however, as I recently discovered it’s also simply misleading.
Why? States where the average household is larger are penalized under a per capita ranking because children don’t earn anything. I discovered this problem when I noticed what an outlier Utah was in the per capita personal income rankings where Utah ranks as the 49th highest in 2009 at $31,612. However, Utah also has the largest average household size at 3.23 people. And there is a large variance among states with the lowest household size belonging to North Dakota at 2.32 people.
As such, failing to hold constant the difference in the size of households rewards states with small households and penalizes states with large household using a per capita personal income metric. To illustrate, let’s look at Maine versus New Hampshire.
In 2009 per capita terms, Maine ranks as the 30th highest at $36,479 while New Hampshire ranks as the 10th highest at $42,585. New Hampshire’s per capita personal income is 16.7 percent higher or $6,107 dollars for every man, woman and child.
However, the average household in New Hampshire is larger than it is in Maine. New Hampshire’s households average 2.62 people (the 24th highest in the country) while Maine’s households average 2.42 people (the 49th highest in the country).
After adjusting personal income by household, New Hampshire ranks as the 14th highest per household personal income at $111,402 while Maine ranks as the 41st highest per household personal income at $88,261. New Hampshire’s per household personal income is 26 percent higher, or $23,141, than Maine’s . . . adjusting for household size makes a big difference. Also note that Maine’s relative economic performance falls from 30th under per capita to 41st under per household . . . another big difference.
My take away from this is that per capita personal income is a seriously flawed metric. A state can, in the short-term, enjoy a bonus to its per capita income by simply having fewer children which shrinks the average household size. However, as Maine is now discovering there is a long-term price to be paid called Demographic Winter. Last year the U.S. Census Bureau reported that Maine’s population in 2009 fell for the first time since at least the 1960’s. Think economic development in Maine is already tough . . . try doing it with a shrinking population base!
I will be posting another blog soon that further illustrates why per household personal income is the better metric.