Per Capita Income: An Economic Misunderstanding

After reading into Oregon’s 10-year plan outcome areas for the economy, I noticed something that really worries me. It mentions closing the income inequality gap and getting the per capita income above the national average. Trying to close the income inequality gap is a nice idea, but raising the per capita income isn’t a good indicator of economic success. This is because it can be raised by the rich getting richer or, worse, the poor getting poorer.

The way we measure per capita income is very simple. It’s an average of all incomes in an area. All of the reported incomes are added together and then divided by the total population. Knowing this, it’s easy to understand how this economic indicator can be influenced by changes on either side. Let’s set up a mock economy and see how this is demonstrated.

There are seven people in our mock economy. Here are their salaries: $17,760, $23,500, $35,000, $25,000, $75,000, $50,000, $125,000. The total of all of these incomes is $351,260 and our total population is seven. When we divide the total of all the incomes by the total population ($351,260/7), we get our economy’s per capita income, which is $50,180. Let’s change the lowest income to $13,920. Our per capita income drops to $49,631.43. Let’s increase the lowest income back to $17,760 and increase the highest income to $150,000. Our per capita income jumps to $53,751.43.

As we can see, per capita income isn’t the best economic indicator because it’s not a good representation of what our mock economy makes. If we took off the highest income, $125,000, our per capita income would be $37,710, a much more accurate representation. Keep in mind that if you take off an income, you have to take off the person from the population. But overall, I professionally would never trust per capita income as an accurate representation of what most people make today.

Income inequality is a real issue in America. I don’t think any economic indicator reflects this better than per capita income. In fact, this indicator would be a good one to compare with the labor force participation rate as well as the unemployment rate. Either way, there are plenty of ways to show the health of the American economy. Just remember that nobody should never use just one or two economic indicators to gauge the overall health of the economy.

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