Personal Income Data Reveal Differences Across U.S. Regions

Because wage disbursements generally make up between 50% and 60% of personal income, one might expect to see the strongest personal income growth occur in states that generate the strongest employment growth. There is certainly a close relationship between the two variables, which can be seen in the chart below that shows annualized growth between the second and third quarters of 2006, with employment on the horizontal scale and income on the vertical. The solid line shows the average relationship between the two concepts.

While most states fall very near the average line, it is the outliers that are the most interesting. As stated above, Washington had the strongest growth in personal income during the third quarter, but it is apparent from the chart that many states had stronger employment gains. Washington's strong income growth came from a 15% jump in the “employer contributions for employee pensions and insurance” category, which includes the exercise of stock options. Microsoft, one of the largest employers in the state, saw its stock price climb more than 17% in the third quarter, so it is not surprising to see the jump in nonwage labor income, as many employees took advantage of the opportunity to cash in options.

On the flip side of the coin, Montana had the strongest job growth of any state, but its income growth fell well below the average line. This is because Montana had the second-lowest average wage gain in the nation, so its strong employment growth did not push up personal income as much as it would in a state with stronger wage gains. Meanwhile, several states experienced employment declines in the third quarter. But two, Michigan and Kansas, achieved income gains well above the average line. Michigan’s growth is due to employee buyouts at auto firms that are restructuring, and Kansas’s growth is due to a jump in dividend, interest, and rent payments.