What Is Income Per Capita?

Income Per Capita Explained

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Income per capita is a measurement of the income earned per person in an area. It estimates the earning power of an individual and is also used to describe the standard of living in a city, state, or country.

The average income per capita is the total income for the area divided by the number of people. However, it can be misleading. A few extremely wealthy people in one area can raise the average and that would make it seem like people have it better than they really do.

For that reason, most economists use median income per capita. The median income per capita is the point where half the people earn more and half earn less. It adjusts for these few extremely wealthy people.

What Is the Current U.S. Income Per Capita?

The 2019 real median income per capita was $35,977. Because there are quite a few extremely wealthy individuals in America, the mean is much higher. In 2019, the mean income per capita was $54,129. The Census Bureau reports the income per capita in the Current Population Survey.

The real median income removes the effect of inflation. It's the only accurate way to compare statistics from year to year.

The COVID pandemic affected the survey. Low-income households were less likely to respond and this made it seem like incomes rose more than they actually have.

How Is U.S. Income Per Capita Measured?

The U.S. Census surveys per capita income every 10 years. It provides a revised estimate every September. The Census calculates per capita income by taking the total income for the previous year for everyone 15 years and older. It then provides the median average of that data. 

The median is the point where 50% of all individuals are above, and 50% are below.

The calculation of the per capita income includes three different components.

First, the Census figure includes earned income—including wages, salaries, and any self-employment income. It does not include borrowed money, withdrawals of bank deposits, tax refunds, gifts, and lump-sum inheritances or insurance payments.

Second, the Census includes investment income including interest, dividends, rentals, royalties, and income from estates and trusts. Capital gains and money received for selling your home are not included.

Finally, it includes government transfer payments. That includes Social Security or Railroad Retirement, Supplemental Security Income, public assistance or welfare, and retirement, survivor, or disability pensions. It does not include food stamps, public housing subsidies, or medical care.

3 Other Income Measurements

There are three other widely-used measurements of income. Average household income is the most common in the U.S. It tells you the income per household, which contains about 2.5 people on average as of 2019. That's why the average household income is higher than income per capita. 

GDP per capita is another measure of income.  It takes the total gross domestic product (GDP) of a country and divides it by the number of people. It's equal to the income earned by all residents and businesses in a country. It doesn't matter if they are citizens or not, as long as they are within the geographic boundaries.

GDP per capita doesn't include income earned from foreign investments. For example, if a company exports and sells products overseas, GDP doesn't include that income.

To compare GDP per capita across years, you need to remove the effects of inflation. That gives you real GDP per capita.

Gross national product (GNP) measures all the income earned by a country's citizens and businesses, regardless of where they made it. For example, if a company exports and sells products overseas, it includes that income. It doesn't count any income earned in the country by foreign residents or businesses. It excludes products manufactured in the country by overseas companies. In 1993, the World Bank replaced GNP with Gross National Income (GNI). It provides GNI per capita for each country.

Trends and Changes in Income Per Capita

Median income per capita is the highest it's been in U.S. history. It's more than 50% higher than in the 1981 recession when the median income per capita was $23,093.

Even though the U.S. per capita earning power has improved since 1981, it hasn't been a steady increase. It declined during recessions and increased when good times returned.

Since 1981, earning power fell three times: during the 1991 recession, the 2001 recession, and the 2008 recession. It will probably dip again due to the 2020 recession.

The 2008 recession was the worst so far. In 2007, a person's buying power was $32,910. That fell to $30,108 by 2012. It didn't regain and surpass the 2007 level until 2016 when it hit $33,132.

The 2020 recession could be even more damaging to income than any in history. The economy contracted a record 31.7% in the second quarter of 2020. That’s worse than the 26% drop during the Great Depression. We won't know the impact on income until September 2021 when the Census releases its report for 2020.

Factors That Impact Income Per Capita

It can take a long time for a country's earning power to improve. During the 2008 financial crisis, unemployment meant too many people couldn't find work to get wages. That didn't turn around until 2016 when earning power returned to 2007 levels.

Over the long-term, there are three major factors that limit income per capita.

First, wage pressure from low-paid countries China and India put downward pressure on wages around the world. Global companies outsource jobs to these countries, which allows them to pay U.S. workers less. This leads to greater income inequality. Those whose jobs can be outsourced receive low wages.

Those at the top, like the CEOs, high-level managers, and owners of the companies, are relatively immune to wage compression.

Another cause of low per capita income is technology. The increasing use of robots and computers has replaced many workers in manufacturing and even office jobs. Meanwhile, those with the skills to manage the equipment are in high demand and earn more income.

The third cause is the rising cost of education. According to the College Board, the price of tuition and fees in public colleges continues to rise year over year. Among Americans aged 25 to 34, only 49% have a college-level education. It's better in nine other countries. Korea tops the list with 70% of its young people having a college education. Fewer than 30% of American adults have more education than their parents. As a result, economic mobility has worsened.

The COVID-19 pandemic could become the fourth cause. Many people remain unemployed as a result of both the pandemic, the 2020 recession, and statewide stay-at-home orders.

Article Sources

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