South Dakota Rankings on Wages, Personal Income and Gross State Product.

South Dakota has historically ranked 49th or 50th in average annual pay per worker. [1] However, on other measures of economic well-being, such as personal income per capita or gross state product per capita, South Dakota ranks much higher at 36th and 34th, respectively. Therefore on one measure, average wage, South Dakota appears to be a very poor state, yet on two other widely-used measures of economic well-being, South Dakota ranks only slightly below the national average. This disparity has confused and troubled many observers of the South Dakota economy. What accounts for this poor performance on the wage measure and much better performance on the income and product measures? This short article examines and reconciles this issue. The reconciliation of these differences reveals some very interesting facts about the South Dakota economy.

We will start by explaining the difference between average wage, personal income, and gross state product. We will then examine how the rankings on these three variables change when we compare average wage and personal income or gross state product on a consistent basis. We conclude that when we measure wages or personal income or gross state product on a per worker basis the disparity in ranking disappears.

Average Wages by State

Average annual pay, or as we will call it the average wage, is a statistic compiled by the Bureau of Labor Statistics of the U.S. Department of Labor by state, county, and metropolitan area. [2] The 1998 data by state is shown in Column (1) of Table 1. As shown in Column 1, the 1998 average wage in South Dakota was $22,754 with a 50-state rank of 49th. The average wage is computed by dividing total annual pay of employees covered by unemployment insurance (UI) programs by the average monthly number of these employees. The average wage includes bonuses, the cash value of meals and lodging when supplied, tips and gratuities, and, in some states, employer contributions to certain deferred compensation plans. Differences in worker and job characteristics, cost-of-living, metropolitan influence, fiscal environment, and amenities are all factors that affect the average wage. [3]

Per Capita Personal Income

Personal income is compiled by the Bureau of Economic Analysis of the U.S. Department of Commerce by state, county, and metropolitan areas. Personal income is defined as income received by persons from all sources - from participation in production, from both government and business transfer payments, and government interest. It is computed by summing the following components:

Wage and salary disbursements

Other labor income

Proprietors' income

Nonfarm

Farm

Personal dividend income

Personal interest income

Rental income of persons

Transfer payments

Less: Personal contributions for social insurance

Resident adjustment

Per capita personal income for 1998 is shown as Column (3) in Table 1. On this measure South Dakota ranked 36th in 1998.

This section provides a rather detailed discussion of the various components of personal income and the reader may want to skip to the next section. Wage and salary disbursements are defined as monetary remuneration of employees. This includes wages, salaries, commissions, tips, bonuses, voluntary employee contributions to deferred compensation plans, and pay-in-kind. The estimates of wages and salaries is based primarily, but not totally, on ES202 data. ES202 data is a form filed with the state employment security agencies (ESAs) from quarterly unemployment insurance reports by employers. Other labor income consists of the contributions by employers to privately administered benefit plans, corporate directors' fees, and miscellaneous fees.

Proprietors' income with inventory valuation and capital consumption adjustments is the current-production income of sole proprietorships and partnerships and tax-exempt cooperatives. Proprietors' income includes the imputed rental income of owner-occupants of farm dwellings but excludes dividends and interest that are received by nonfinancial business and the nonfarm rental income received by non-real estate business. It is divided into nonfarm and farm proprietors' income. Farm proprietors' income includes several imputed items. These are the imputed gross rental value of farm housing and the imputed value of home consumption. Government payments are also included as part of farm proprietors' income.

Personal dividend income is payments made by corporations to noncorporate stockholders. Personal interest income is interest income received by individuals, nonprofit, institutions, and estates and trusts. Rental income consists of the monetary current-production income from persons from rental of real property. Rental income also includes the imputed rental income of owner-occupants of nonfarm dwellings.

Transfer payments are income payments to persons for which no current services are performed. They are payments by government and business to individuals and nonprofit institutions serving individuals. Government payments include such items as retirement and disability insurance benefit payments, Medicare and Medicaid payments, unemployment insurance benefit payments, veteran benefits, and federal education assistance payments.

Personal contributions for social insurance include payments by employees, self-employed and other individuals who participate in the old-age, survivors, and disability programs.

Personal income is a measure of income by place of residence. This adjustment takes into account the place of work and allocates that income to the place of residence. This is an important adjustment for military personnel and interstate commuters.

Gross State Product

Gross state product for each state is the state counterpart of the nation's gross domestic product. Essentially, it is measure of a state's output, which is computed by summing output or product originating in all industries in the state. It is the most comprehensive measure of a state's economic production. Gross state product is published annually by the Bureau of Economic Analysis of the U.S. Department of Commerce. The data is available for the years l963-l998. [4] Gross state product per capita and per worker is shown in Columns (7) and (9) in Table 1. Note, in 1998 South Dakota ranked 34th on the per capita measure and 46th on the per worker measure. Gross state product per worker is a measure of average worker productivity.

South Dakota and U.S. Comparisons

Per capita personal income is computed by dividing personal income by the July 1 population of the same year. Table 2 provides 1998 personal income and its components for South Dakota and the United States. It should be noted that the major difference in the various components of personal income between South Dakota and the U.S. is in the proportion of personal income derived from wages and salaries and proprietors' income (nonfarm and farm). In South Dakota approximately 49 percent of personal income is derived from wages while at the U.S. level this proportion is about 57 percent.

For proprietors' income (nonfarm and farm) in South Dakota, the proportions were 8.6 and 4.7 percent, respectively. South Dakota had the highest percentage of personal income accounted for by proprietors' income in the nation in 1998 at 13.3 percent. South Dakota also had the highest farm proprietors' income with 4.7 percent of the total while at the U.S. level it was only 0.3 percent. [5] The share of nonfarm proprietors' income of total personal income was 8.6 percent compared to 7.9 percent for the nation. [6] This relatively large share of personal income going to proprietors' income indicates that South Dakota is a state of small farmers and shopkeepers.

The 1998 income per proprietor for South Dakota and the U.S. are shown below. In South Dakota, the average nonfarm proprietor earned $17,530, which is less than the average South Dakota wage of $22,754. The average farmer earns a bit more with an average of $24,708. Of course, no adjustment is made to these numbers for return of investment or opportunity cost of the owner's time. At the U.S. level, nonfarm proprietors' income is higher and farm proprietors' income is lower than the South Dakota average.

The other components of personal income, such as other labor income and transfer payments, were approximately the same proportions of personal income for both South Dakota and the U.S. South Dakota had a slightly higher proportion of income derived from property income (dividends, interest, and rent).

Source of Ranking Differences for Wages, Personal Income and Gross State Product

As indicated at the beginning of this section there seems to be an anomaly in South Dakota's rankings in terms of the average wage and per capita personal income and gross state product. In 1998, South Dakota ranked 49th on average wages, 36th on per capita personal income and 34th on per capita gross state product (1998). Is there an inconsistency? We will try to provide an answer to that question.

As shown in previous sections, the average wage is calculated as the total wages and salaries divided by the number of workers. Personal income per capita is personal income divided by population. In other words, each of these measures has two different denominators. To make them strictly comparable we must divide them by the same measure. Since personal income is a broader measure of income, which includes wage and salary workers and self-employed proprietors, we must divide personal income by total employment. Total employment includes wage and salary workers and self-employed nonfarm and farm proprietors.

Table 1 summarizes these relationships. Column (1) presents the average wage by state data which indicates that South Dakota ranks 49th among the states. Column (2) is per capita personal income for which South Dakota ranks 36th These two, columns are a source of the concern we talked about. Column (5) shows personal income per worker for which South Dakota ranks 48th. [7] Therefore, if we compare wages and personal income on a comparable basis, per worker, the South Dakota rank is approximately the same as the average wage per worker where South Dakota ranks 49th. Columns (7) and (9) show GSP per capita and GSP per worker. [8] Again the relationship is the same as for personal income. That is, on GSP per capita South Dakota ranks 34th and on GSP per worker South Dakota ranks 46th

The Structure of the South Dakota Economy Explains the Anomaly

This investigation of the source of the wage-income-product anomaly reveals some facts about the structure of the South Dakota economy. First, the ratio of workers to population in South Dakota is very high. See Column (2) in Table 3; In South Dakota, the ratio of total employment to population is 68.4 percent compared to the U.S. ratio of 59.3 percent. South Dakota ranks 4th on this measure. Only Nebraska, North Dakota and Colorado have higher ratios of employed persons to population. While the South Dakota ratio of wage and salary workers to population is only slightly above the U.S. average, at about 52 percent versus 50 percent, the big difference is in the proportion of total workers who are self-employed proprietors. As shown in Column (5), the proportion of total employment that is proprietors is 23.6 percent which is second only to Montana with 26.1 percent. This provides the answer of why we rank so differently on these two measures. That is, when we measure personal income or gross state product on a per capita basis we are using a much broader measure of income. It includes proprietors' income, property income, and transfer payments. Since South Dakota has a slightly lower ratio of wage and salary workers to population and a very high ratio of proprietors to population, when total income is reported on a per capita basis we rank much higher. When wagers per worker are reported we rank much lower because the productivity of the average worker is low (46th on gross state product per worker). Consequently, South Dakota moves from 49th on the wage measure to 36th on the per capita income measure due to the fact that such a large proportion of South Dakotans are productively employed. States like West Virginia, Mississippi, Lousiana, New Mexico and Alabama are all low-wage states and low employment to population states and therefore low per capita income states.

If South Dakota had the same employment to population ratio as the U.S., 59 percent versus 68 percent, South Dakota personal income per capita would rank 84th which is comparable to the average wage rank.

Conclusion

So what do we conclude? First, South Dakota has a very high ratio of workers to population. This is primarily because we have a lower ratio of wage and salary workers to the population and a very high ratio of self-employed proprietors to the population. When these two forces are combined, South Dakota has very high ratio of workers to population. Since personal income measures both wages and proprietors' income, South Dakota has a high ratio of personal income to population (per capita). That is why we rank 36th on personal income per capita, 34th on GSP per capita and 49th on wages per worker. However, when we compare personal income per worker rather than population across states, we once again rank very low with a ranking of 48tjh Likewise, when we compare GSP per worker South Dakota ranks 46th.

About the author:

Ralph J. Brown is Professor of Economics at the School of Business at the University of South Dakota in Vermillion.

Endnotes

(1.) Actually for every year until 1998 South Dakota ranked 50th in average annual pay. In 1998, South Dakota ranked 49th edging out Montana by several hundred dollars.

(2.) The 1998 average, annual pay by state and industry is available on the following web site: http://stats.bls.govnews.release/annpay.nws.htm.

(3.) For a detailed discussion of the factors that determine wage differences between states see Ralph J. Brown, "The South Dakota Wage Study: State Differences in Average Annual Pay," South Dakota Business Review, Vol. LVIII, No. Ill, March 2000.

(4.) Data on Gross State Product is available, on the internet at http://www.bea.doc.gov/bea/regional/gsp/

(5.) The closest state is North Dakota with 2.9 percent.

(6.) South Dakota ranked 40th in the share of personal income accounted for by nonfarm proprietors' income.

(7.) In this case, personal income is divided by total employment, which includes wage and salary and proprietors' (self-employed) employment.

(8.) Once again total employment is used to determine GSP per worker.