Occupational hazard: why Indiana's wages lag the nation.

• Author: Slaper, Timothy F.

Last year, Indiana's per capita personal income (PCPI) was $34,605--more than $5,000 below the national average. Since 2001, per capita income has grown at an average annual rate of 3.6 percent for the United States but only 3 percent for Indiana (see Figure 1).

[FIGURE 1 OMITTED]

In the Fall 2009 issue of the Indiana Business Review, Andy Zehner discussed many of the occupational dynamics that contribute to Indiana's lackluster personal income performance. The key to understanding Indiana's low PCPI is dissecting the state's occupational mix and, with it, the compensation associated with those occupations. It is of no surprise that from 2001 to 2008, the state's average annual wage for all occupations, published by the Bureau of Labor Statistics (BLS), has marched in lock-step with changes in per capita income reported by the Bureau of Economic Analysis (see Figure 2).

[FIGURE 2 OMITTED]

Zehner makes several important points:

* The decline in manufacturing jobs isn't sufficient to cause sluggish PCPI growth.

* Workers across the board--with a few exceptions--are paid less in Indiana than for comparable jobs in other states.

* The lower Indiana cost of living doesn't make up for the difference.

* Attracting manufacturing plants--"economic development"--won't boost average compensation.

In this article, we will dig deeper to analyze occupational data in greater detail and uncover the shifts in Indiana's workforce that would explain why it is so difficult to move the PCPI needle. Using shift-share analysis that dissects the difference in wages between the state and nation, we present trends in Indiana's occupational mix and compensation using the United States as the benchmark. Then, we compare Indiana's performance within the Midwest.

Shift-Share Analysis

Indiana's occupational mix changes over time. Some occupations wax and others wane. Health care occupations are on the rise, for example. Printing machine operators, on the other hand, are in decline. Over time, one should see the percentage of health care occupations increase and the percentage of printing machine operators decrease.

Few occupations share the same compensation profile. Thus, as one occupation that pays well in Indiana is ascendant and another occupation that pays relatively poorly is in decline, all other things equal, the average wage would increase.

Shift-share analysis enables us to track these types of changes as the economy transforms. Shift-share analysis breaks down wage differentials into three components:

1. Wages: This component measures the extent to which the difference between state and national average wage is due to the difference between state and national wages for a given occupation.

2. Occupation Concentration: This component measures the extent to which the difference between state and national average wage is due to the difference between state and national share of employment for a given occupation.

3. Residual: This component measures the extent to which the difference between state and national average wage is due to factors other than those related to wage and share of employment for a given occupation.

   We sorted the twenty-two broad occupation categories defined and reported by the BLS according to their average national wage and then grouped them into three sets--higher, middle and lower wage. Table 1 presents these three tiers of occupations (broadly defined) showing differences in wages between the United States and Indiana for 2008. These data present a snapshot of Indiana's occupation mix relative to the nation using recent data from the BLS Occupation Employment Survey (OES). (1)

   Table 1: Tiers of Occupations by National Average Wage, 2008 Occupation Indiana Concentration Average Average Employment Relative to Indiana National the United Wage Wage States Higher Tier Management 108,640 82% $86,800 $98,230 Legal 13,875 64% 67,735 90,360 Computer and 43,310 61% 61,800 73,345 Mathematical Architecture and 46,170 85% 61,315 70,155 Engineering Health Care 159,905 105% 60,920 66,455 Practitioners and Technical Business and 90,630 69% 56,130 63,565 Financial Operations Life, Physical, and 19,400 70% 51,375 63,150 Social Science Arts, Design, 31,430 81% 38,910 49,540 Entertainment, Sports, and Media Middle Tier Education, Training, 163,895 90% $42,805 $47,535 and Library Construction and 139,275 97% 42,695 41,485 Extraction Installation, 133,760 114% 40,545 40,580 Maintenance, and Repair Community and Social 33,190 84% 37,005 41,165 Services Protective Service 55,950 83% 33,715 39,475 Production 380,820 175%. 33,485 31,815 Sales and Related 296,350 95% 32,775 35,660 Lower Tier Transportation and 262,530 126% $30,725 $31,065 Material Moving Office and 455,615 90% 29,550 31,710 Administrative Support Farming, Fishing, and 3,105 32% 27,385 23,100 Forestry Health Care Support 73,235 91% 25,465 25,970 Building and Grounds 92,015 96% 22,880 23,965 Cleaning and Maintenance Personal Care and 62,780 85% 22,340 24,050 Service Food Preparation and 262,325 106% 18,050 19,830 Serving Related Occupation Difference Higher Tier Management -$11,430 Legal -22,625 Computer and -11,545 Mathematical Architecture and -8,840 Engineering Health Care -5,535 Practitioners and Technical Business and -7,435 Financial Operations Life, Physical, and -11,775 Social Science Arts, Design, -10,630 Entertainment, Sports, and Media Middle Tier Education, Training, -$4,730 and Library Construction and 1,210 Extraction Installation, -35 Maintenance, and Repair Community and Social -4,160 Services Protective Service -5,760 Production 1,670 Sales and Related -2,885 Lower Tier Transportation and -$340 Material Moving Office and -2,160 Administrative Support Farming, Fishing, and 4,285 Forestry Health Care Support -505 Building and Grounds -1,085 Cleaning and Maintenance Personal Care and -1,710 Service Food Preparation and -1,780 Serving Related Source: IBRC, using data from the Bureau of Labor Statistics Note that no broad occupation group in the higher tier has a greater wage in Indiana than the national average. With the exception of farming, fishing and forestry, no lower-tier occupation group in Indiana has a greater average wage than the national average. Only in the middle tier does Indiana have two occupation groups--production and construction/extraction--that enjoy wages exceeding the national average.

   The shift-share...