We have in our last few reports deconstructed per capita income into its components. Doing that has made clear the importance of wages and benefits paid by private sector employers to the future prosperity on the country. We measure that with private sector employment earnings per capita corrected for inflation.
Our new report –– The New Path to Prosperity: Lessons for Michigan From Two Decades of Economic Change –– makes even clearer that private sector employment earnings per capita are the predominant engine of long term, sustainable growth in the standard of living.
The report’s focus is the long term, looking at what happened to the American and Michigan economies over the last two decades, from 1990 to 201. In doing so, we grouped together two very different decades: the boom times from 1990-2001 and the, at best, anemic growth from 2001-2011. The differences between the two periods are stark:
- Employment growth of 27.2 million in 1990-2001 compare to 10.3 million in the next decade.
- Per capita income growth adjusted for inflation of $6,300 compared to $2,000
- Private sector employment earnings per capita adjusted for inflation growing by $5,000 in the first period, compared to a loss of $700 in the second.
- Transfer payments per capita adjusted for inflation accelerating, growing by $1,200 from 1990-2001 compared to growth of $2,100 from 2001-2011
Despite these differences we are comfortable combining the two periods because the underlining structural trends are the same. We do not know if the coming decade or two will be more like 1990-2001 or 2001-2011 or someplace in between. As we explored in my last post, what we are confident of is that, primarily due to the ongoing force of globalization and technology, the American economy will become more and more service, rather than goods producing, based. And in that economy, knowledge-based services are almost certain to be where job growth is the strongest and average wages are the highest.
But it is also clear that for the country to do well—to become more prosperous—those trends will have to be reversed. Slow, let alone declining, real private sector employment earnings growth, combined with rapid growth in transfer payment income, is not a sustainable path to a rising standard of living.
You can see the power of private sector employment earnings growth in the difference between Michigan and Minnesota over the two decades. In 1990, per capita income in Minnesota and Michigan was close: $33,200 in Minnesota compared to $31,600 in Michigan. No more! Per capita income corrected for inflation grew by $11,300 in Minnesota over the two decades, compared to $4,700 in Michigan.
Real private sector employment earnings per capita grew over those two decades in Minnesota by $7,400, accounting for 65 percent of the state’s per capita income growth. In Michigan, those earnings grew by only $1,000, 21 percent of the state’s per capita income growth.
Its clear that Michigan and the country need the kind of real private sector employment earnings growth that Minnesota is experiencing to achieve a sustainable rising standard of living.