Following the first post-World War 2 year-over-year decline in 2009—falling 5.8 percent—California personal income grew 3.1 percent in 2010 and 5.2 percent in 2011. However, the details behind these trends point to a change in the nature of California’s economic recovery.
Personal Income Defined
Personal income is the earnings received by all persons from:
- Employment (wages and benefits net of Social Security payroll taxes).
- Property income (dividends, interest and rent).
- Proprietors’ income (individual and partnership business income).
- Public and private transfer payments, (Social Security, welfare, Medicare, MediCal, etc. from the public sector, and household credit losses from the private sector).
Personal income differs from “cash” income in that it:
- Includes several non-monetary income items such as employee health insurance benefits and employer contributions to pension funds (Other Labor Income).
- Excludes capital gains (because gains do not represent current production).
- Excludes payouts from all pension plans, including IRA, 401k and traditional pension plans.
Income Grows in 2010 and 2011
Compensation paid to employees, or wages and salaries, is the dominant component of total personal income, accounting for 52 percent in 2010 and 2011. In addition to the large share it represents, trends in wage growth have varied over time. Historically, non-wage forms of income, such as proprietors’ income, dividends, interest, and rent, have grown faster than wages and salaries. From 1970 through 1995 non-wage income in California rose an average of 9.9 percent each year while wages grew only 7.9 percent. During the late 1990s, performance-based and stock market-linked compensation, such as bonuses and stock options, grew in importance, especially in emerging internet-connected industries. This development, coupled with stock market activity, led to greater wage volatility and, for a time, faster wage growth. From 1996 through 2000, wages grew 9.0 percent annually on average while non-wage income rose only 6.6 percent each year. Following the collapse of the ‘dot.com’ bubble, wage growth slowed dramatically and once again non-wage income led the way. From 2001 through 2011, wages grew 2.7 percent annually on average while non-wage income rose 4.4 percent on average.
Personal income growth in 2011 followed this trend. California’s total personal income grew 5.2 percent led by 6.2 percent growth of non-wage components and 4.3 percent growth in wage and salary disbursements. Property income—dividends, interest, and rent—was the leading income component, growing over 8 percent from 2010. This was nearly twice the growth rate of wages and salaries (4.3 percent) and accounted for almost 27 percent of total income growth in 2011. After wage and property income, nonfarm proprietor’s income and employer contributions for employee pension and insurance made the next largest contributions, accounting for over 13 percent of total personal income growth in 2011.
Wage growth surges at the end of 2010, then moderates
After declining in 2009, wage and salary disbursements increased in 2010 with a modest 2-percent increase followed by 4.3-percent growth in 2011. These annual patterns, however, belie a gradual slowing in wage growth since the beginning of 2011. Wage compensation surged during the final quarter of 2010 and the first quarter of 2011. This surge was concentrated in four high-wage industries, including Mining, Durable Goods Manufacturing (including Computer and Electronic Manufacturing), Professional, Scientific and Technical Services, and Management of Companies, which accounted for a very disproportionate shares of these gains. Two other high-wage industry sectors—Information and Financial Activities—also recorded unusually strong wage growth. It appeared that as much as 30 percent of this surge came in the form of bonuses and stock options, which are often subject to significant fluctuations.
For the most part, subsequent wage growth in these sectors moderated dramatically. Only the Finance and Insurance sector posted higher wage growth at the end of 2011 compared to the end of 2010, and only just slightly better. Wage compensation in the Mining and Durable Goods Manufacturing sectors actually declined in the fourth quarter of 2011 compared to a year earlier.
In 2011, wages grew 4.3 percent based largely on faster wage growth across a broad range of lower-paying sectors. The strongest gains in 2011 were made in Professional and Business Services (7.7 percent) and Information (6.6 percent). Construction saw the most dramatic turnaround. Construction wages declined for three consecutive years starting in 2008 when a sharp drop-off in nonresidential construction put further downward pressure on a construction industry that had already experienced a dramatic slowdown in new home construction starting in the middle of 2005. Wages paid in the construction industry fell over 19 percent in 2009, followed by a 10-percent drop in 2010. Construction wages changed direction and expanded 3.5 percent in 2011 when home building started recovering. In addition, Nondurable Manufacturing and Other Services, two sectors that pay below-average wages, saw big improvements.
Changing trends in wage rates
Three high-paying industries, including two that are considered important California specialties, stand out. In 2010, Mining, Durable Goods Manufacturing, and Information were the wage rate growth leaders, with average wages rising 12.9 percent, 10.1 percent, and 10.6 percent, respectively. Average annual wages paid in these sectors ranged from $89,000 to $120,000 in 2011 and they accounted for an exceptionally large share of total state wage growth in 2010. However, this phenomenal growth was not sustained. The pace of average wage growth in these sectors slowed to single-digits in 2011. The average wage paid in Mining rose 1.3 percent; Durable Goods Manufacturing, 3.7 percent; and Information, 5.5 percent.
At the same time, wage rate growth accelerated notably in four other industries. Average wage escalation in 2011 was led by the Management of Companies and Enterprises subsector of Professional and Business Services, which rose 7.8 percent in 2011 after rising 5.6 percent in 2010. Average wages in the Arts, Entertainment, and Recreation subsector of Leisure and Hospitality rose 5.5 percent in 2011, a substantial acceleration from its 3.1-percent growth in 2010. After stagnating in 2010, wage rates paid in Construction rose 4.4 percent in 2011—the strongest acceleration among major industry sectors. Finally, wage rates paid in the Real Estate and Rental and Leasing subsector of Financial Activities grew 5.2 percent in 2011 after rising 2.1 percent in 2010.
High, but volatile wages
These trends are clearly reflected in 4th quarter average wage payments, which indicate the importance and volatility of income earned in high-wage industries, particularly when it is paid in the form of performance-based instruments like bonuses and stock options. These payments are fairly sensitive to national and global economic trends. Average wages paid in the 4th quarter of 2010 rose 4.1 percent on a year-over-year basis—the strongest growth since the end of 2007. At the end of 2011, average wages grew only 1.1 percent over the year. Trends in the high-wage sectors noted above accounted for a large part of this slowdown.
- Average wages earned in Mining increased substantially (over 30 percent) in the 4th quarter of 2010 from a year earlier following a period of rising oil prices and record-setting petroleum industry profits. At the end of 2011, though, this sector’s average wage had dropped nearly 19 percent, most likely due to weaker global petroleum demand and rising energy production.
- The wage rate paid in Durable Goods Manufacturing (computers and electronics) grew 11.6 percent in the final quarter of 2010, then dropped almost 5 percent by the close of 2011. Information wage rates which were up almost 9 percent in the last quarter of 2010, nearly stagnated in 2011, rising less than 1 percent at the end of the year. After rising 6.6 percent at the end of 2010, average wages in Professional and Business Services rose just over 2 percent by the end of 2011.
- These trends reflect the strong resurgence of global demand for high technology goods and services that resulted from the initially strong recovery from the recession in 2010, particularly by China. In 2011, however, global economic growth was slowed by the European economy and by China’s attempts to moderate its rapid expansion in 2010.
Conversely, as noted above, between 2010 and 2011 wage rate growth improved in Construction; Arts, Entertainment, and Recreation; Real Estate Rental and Leasing; and in Other Services—the only industries in which the pace of year-end wage rate growth in 2011 improved from 2010. This is generally a reflection of the broadening of California’s economic recovery. Real estate markets stabilized in 2011, beginning with increased demand for rental properties. General economic improvements also reinvigorated California’s travel and tourism industries.
Personal income data for 2011 demonstrates that California is still home to many dynamic high-paying industries. This income, though, is more volatile than earnings in other industries. Although income growth among California’s specialties was tempered in 2011, other industries picked up the pace, indicating that the recovery became more broad-based and sustainable.