Finding new cheese: why Indiana's per capita personal income lags (and how to fix it).

• Author: Slaper, Timothy F.

There has been a lot of hand wringing about Indiana's per capita personal income (PCPI) not only lagging the nation, but that the gap between the two continues to widen. Figure 1 tells the grim tale. Except for a brief recent uptick in 2009 and 2010 that resulted in the recovery in manufacturing outpacing the recovery in other sectors of the national economy--and the upticks following the recessions in 1991 and 2002 can also be explained this way--the overall trend is disheartening. While holding its own compared to the nation as a whole through the 1950s and 1960s, Indiana started losing ground in the 1970s. But it was the 1980s, when manufacturing was being hollowed-out with nothing to replace it, when the slide accelerated (see Figure 1).

[FIGURE 1 OMITTED]

Despite his best efforts, former Governor Daniels was unable to reverse the trend. While one may fault him for choosing a headline measure--PCPI--that is brutally difficult to change and for which we would judge his policies and initiatives, his administration helped craft a business-friendly environment in the state. The trouble is, this didn't help generate the number and type of jobs that would favorably move the PCPI needle.

An IBR article from 2010, "Occupational Hazard: Why Indiana's Wages Lag the Nation" posits that to close the PCPI gap, Indiana needs to change its occupational mix. (1) Adding traditional manufacturing jobs, as desirable as they are, just won't close the gap. The compensation for these jobs hovers around the state's average pay, although many advanced training and educational credential jobs are well paid. In order to close the PCPI gap, Indiana needs jobs that pay well above the average.

This article makes the same point, but using different data. The "Occupational Hazard" article focused on the Midwest, while this analysis looks at national trends.

In broad strokes, the jobs that Indiana needs tend to be in occupations that require higher levels of educational attainment. Indiana has a troubling lower concentration of occupations associated with headquarters (running businesses), design and engineering, and high tech.

The Relationship Between Educational Attainment and PCPI

It is no wonder that Indiana's PCPI lags the nation. We also lag the nation in terms of educational attainment. In 2011, Indiana ranked 43rd in the country in terms of the percent of the population holding a bachelor's degree or higher. (2) Indiana's nearest neighbors in the education department are Nevada and Alabama, ranking 44 and 45, and Tennessee and Oklahoma, ranking 42 and 41, respectively.

As Figure 2 shows, there is a strong correlation between educational attainment and PCPI.

[FIGURE 2 OMITTED]

This relationship--greater educational attainment and income--has also gotten stronger over time. Figures 3 and 4 show the relationship--the R-squared that measures the degree to which the variation in PCPI can be explained by educational attainment.

[FIGURE 3 OMITTED]

[FIGURE 4 OMITTED]

The strength of the relationship built steam over time from 0.42 in 1960 to 0.62 in 2000. The 2011 R-square of 0.57--a slight interruption in the march of educational attainment as the key driver in PCPI--can probably be attributed to the economic downturn and many college graduates being underemployed. The trend for all the states has been toward higher and higher achievement; overall, the nation improved by 20.8 percentage points from 1960 to 2011. Massachusetts, the state with the second-highest positive difference compared to the county, improved more than 30 percentage points over the same period. Indiana's educational attainment improved a mere 16.7 percentage points, 40th among the states.

The state of Maryland provides an intriguing contrast to Indiana. In I960, 9.3 percent of Maryland's population had completed a bachelor's degree or more, while in Indiana, the statistic was 6.3 percent. (The national average was 7.7 percent in 1960.) By 2011, Maryland had increased its level of educational attainment by 27.5 percentage points, to 36.8 percent, the second-highest gain in the county. Maryland's performance in PCPI growth is an inverse of Indiana's. Figure 5 is in stark contrast with Figure 1.

[FIGURE 5 OMITTED]

It would seem clear that the educational attainment of the population is driving the tale of two Americas.

What We Do Affects How Much We Earn

The established wisdom is that innovation drives economic growth. Developing new and differentiated products and services is where the money, and jobs, are. Producing undifferentiated goods--commodities like uniform agricultural products--doesn't pay as well.

The Indiana Business Research Center, supported by a grant from the Economic Development Administration, developed an innovation index to measure a region's innovation capacity. The index is an amalgam of components that are thought to contribute to innovation. It made sense to test a few of the components--hightech employment or STEM-related graduates, for example--to see if there were any relationships between these innovation measures and PCPI. Figures 6 and 7 show the relationship between high-tech employment and science and engineering graduate students with respect to PCPI. Here we see the generally positive influence that high-tech and science and engineering have on a state's economy.

[FIGURE 6 OMITTED]

[FIGURE 7 OMITTED]

The concentration of any particular occupation in a state will affect that state's PCPI. (3) This was one take-away from the aforementioned "Occupational Hazard" article. Figure 8 provides another glimpse into this phenomenon. The...