Income in America: Where Does it Come From?

January 27, 2012 Disclosures POSTED IN Economy

Over the past 65 years the amount of income received by Americans, as a whole, has generally increased over time. The source of this income, however, has varied a great deal. The variation speaks volumes about the underlying opportunities available to earn or receive different types of income in America. The sources of income might also play a large part in determining the pace of economic growth.

Today, the Bureau of Economic Analysis released the Q4 2011 Personal Income and its Disposition report. In the data lie clues as to the economic health of individuals in the U.S. and the potential of the U.S. consumer to drive future economic growth. With the onset of the Great Recession in 2007, income per capita plunged. While it has began to recover after the recession ended, it has yet to reach the previous peak.

While the total amount of income received certainly merits attention, the source of this income provides a deeper understanding of income in America. Over time the statistics read like a narrative and reflect how Americans historically have received income and what it has meant for the U.S. economy.

The first two income charts below reflect the source of American income as a whole. These charts illustrate that, since 1970 when income received via compensation for employment peaked around 74%, the income stream for Americans has broadened. The source of income for American citizens can be broken down into three distinct periods. Each era is defined by what the second largest stream of income is for individuals. (i.e. the highest point of any given year in the Income 2 of 2 chart.)

1947 – 1967 – Proprietor income. During the post World War II period, the U.S. economy went through a great boom and business owner income accounted for a great amount of overall American income. During this period small businesses still reigned supreme.
1968 – 2008 – Personal income on assets. During the first half of this period, income on assets was roughly in line with proprietor income and transfer receipts as the U.S. left the gold standard, went through a series of recessions (1969-1970, 1973-1975 and 1980-1982), and battled high inflation. Over the second half of the period, beginning in 1981, income on assets began to increase rapidly as a source of income. A reduction in income and capital gains taxes in the mid 1980s and booming capital markets were both responsible for the change in the degree to which Americans relied on income on assets.
2008-? –Current transfer receipts. Once the Great Recession hit at the tail end of 2007, transfer receipts became the second largest source of income for Americans. This occurred for multiple reasons. First, income on assets as a source decreased as interest rates plunged. Second, the front end of the baby boom generation began to draw on social programs such as Medicare and Social Security for the first time. Third, unemployment and other social programs that act as shock stabilizers during economic downturns kicked in.

The source of American income speaks to the demographic make-up of the nation and the post World War II globalization and conglomeration of business. By simply following two trends: the baby boom generation (individuals born between 1946 and 1964) and the globalization of business after World War II, the secondary sources of income are logical.

Small businesses, dominant prior to World War II, gave way to larger corporations, hence the decline in proprietor income.

By the 1970s the baby boom generation started to collect a paycheck and began saving and investing during a period of rising interest rates. Globalization and the rise of big business since the 1970s generally increased profits and, when coupled with a lower tax rate, allowed for income on assets to become the second largest source of income.

Due to the increased use of social programs, which for the most part came into being between 1940 and 1968, government transfers now account for the second largest source of income. As the baby boom generation is now beginning to retire and qualify for social security and medicare, individuals have started to draw on programs such as social security and medicare. These programs, coupled with medicaid, account for a growing source of all income (currently, social security 5.5%, medicare 4.2% and medicaid 3.1%).

Where Americans receive income from is an important factor in determining how much income is spent (or saved) and where it is spent (i.e. healthcare for medicare and medicaid). It will be worth watching to see if transfer receipts continue to account for the second largest source of income for Americans and to see if total income, outside of transfers, struggles to increase at a pace seen prior to the Great Recession. The continuation of these trends for an extended period of time could determine the pace of growth in the American economy.

Personal current transfer receipts, from above, broken apart into the six major sub components.