Meet the Author

Guhan Venkatu |

Vice President and Senior Regional Officer

Guhan Venkatu

Guhan Venkatu is vice president and senior regional officer at the Pittsburgh Branch of the Federal Reserve Bank of Cleveland, where he manages relationships with key stakeholders in the area and is responsible for monitoring the region’s economic environment. For the past several years, his economic research has focused on inflation and inflation expectations, housing and household finance, and factors related to regional economic growth.

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04.05.2012

Economic Trends

Income Growth in the Fourth District since 1970

Guhan Venkatu

One of the key ways to assess the economic well-being of residents in an area is to consider the area’s median household income. Median household income is the income level at which half of all the households in the area have less income and half have more. Unlike average income, median income is less sensitive to extremes in the distribution. As such, it is a better representation of the amount of income available to a typical household.

Inflation-adjusted median household income in the United States has risen from just under $44,000 in 1970 to around $50,000 in 2010, an increase of about 13 percent in real purchasing power. Over this same period, median household incomes in some of the major metropolitan statistical areas (MSAs) of the Fourth District have taken different paths. Columbus and Cincinnati have seen the strongest gains among the eight District MSAs shown in the charts below. Pittsburgh has also seen notably larger increases in median household income than the other areas. Interestingly, these three MSAs began the 40-year period with the lowest median household incomes among the eight areas shown. The remaining five District MSAs have seen very little real income growth over this time, and indeed a few have seen outright declines.

What accounts for these differing trajectories? For the 100 largest U.S. metro areas in 1970, two factors explain almost a third of the variation in median household income growth over the subsequent 40 years: the share of overall employment in the area that was in manufacturing industries in 1970 and the percentage of the population with bachelor’s degrees (BAs) in 1970.

Metro areas that had a higher manufacturing-employment share in 1970 generally had less median household income growth from 1970 to 2010. The District MSAs among the nation’s 100 largest generally conformed to this broader pattern. They are in the lower-right quadrant of the chart below, that is, in the upper half of the distribution of manufacturing-employment share and in the lower half of the income-growth distribution.

The share of residents with a BA in 1970 was also predictive of median income growth in a metro area from 1970 to 2010. This time, the Fourth District’s MSAs are clustered in the lower-left quadrant of the chart, that is, generally low in BA attainment in 1970 and low in income gains over the 40 years thereafter. (There is some correlation between the manufacturing-employment share and BA attainment. However, even after accounting for this, each variable has an independent influence on median household income growth.)

Have these relationships changed over time? One way to consider this question is to split the 40-year period into two equal parts (1970-1990 and 1990-2010) and do the same sort of analysis as done above. Since we’re measuring income changes over shorter periods in this case, we can’t make a direct comparison to the results using the entire period. However, we can get a sense of how important the manufacturing-employment share and BA attainment are in predicting income growth in the ensuing 20-year periods, and whether this influence is changing over time.

For the manufacturing-employment share, the relationship to median household income growth does not appear to change noticeably in the two 20-year periods. When we take the manufacturing-employment share in 1970 and 1990 and plot these against the changes in median household income in the subsequent 20 years, the slopes of the two best-fit lines don't differ much.

The story for BA attainment, however, is quite different. There is a noticeable difference between the two periods. BA attainment appears to be much more important in the earlier period than it is in the later period. While there still seems to be a positive relationship between initial BA attainment and subsequent income growth, the slope of the best-fit line is actually statistically indistinguishable from zero.