Econom.icDveomn Italy Project C/59-16 REGIONAL DIFFERENTIALS IN PER CAPITA INCOME UOSA, 1929 1957 Center for International Studies Massachusetts Institute of Technology Cambridge, Massachusetts July, 1959 REGIONAL DIFFERETIAIS IN PER CAPITA INCOME UoS*Ao 1929 - 1957 A. Grasiani 1. Long years of free and politically unrestricted movement of people and resources across the country apparently have failed to produce equalisation of per capita personal incomes in the various regions of the United States0 In the year 1957, the ratio of personal poco income in Connecticut to poco income in Mississippi was that of 3 to la It seems, however, that about 30 years ago the gap between rich and poor regions was remarkably wider than it is today and that in spite of the still existing discrepancies, a substantial process of convergence has taken place between 1929 and 1957* The extent and the main characteristics of this process are the subject of this paper, All that we are going to say about income differentials should be viewed against the general background of growth of the whole country0 The national trend was one of strong growth; GNP expanded on average at the rate of 3 per cent a year since 1929, Per capita income, also in real terms, increased by two thirds, while population increased by over 40 per cento However, the general pattern of the country conceals wide movements in the relative positions of individual regions0 A first summary view of how the situation has evolved since 1929 is offered in Table 1: Table 1 Personal income per capita 1929 1934-36 1938-O 1948.50 1953-55 1955 1956 1957 1oU.S.A0 100 100 100 100 100 100 100 100 2 16 155 162 135 13? 136 ih5 139 39 50 50 49 51 49 47 0 3o2 M W.4 3o0 3o0 Richest State 3o Poorest State 2 h 38 Ratio of 2. to 3* -- W 208 3 New York 2 South up to 1936; Delaware after; Connecticut in 1957. Carolina in 1929; Mississippi after. District of Columbia disregarded. The ratio appearing in the last row is a crude measure of the dispersion of regional incomes; it gives an idea of how far apart the "tails" of the distribution were over the relevant period, but supplies no information as to the point of howa of incomes, people occupied the extreme positions in the scale Moreover, in considering the absolute magnitude of the gap, it should be borne in mind that the ratios were computed on the basis of per capita incomes by State-. If it were possible to compute the same ratios on a county basis, the dispersion would result to be automatically wider; while on the other hand, the same computation carried out at a higher level of aggregation, namely by regions, shows a sensibly smaller gap, of about 3 to 1 in 1930 and 2 to 1 in 1950o1 A few comments can be made on Table lo First of all it is undeniable that a remarkable closing up of the gap has taken place in the years following 1929. However, if we look at the timing of the process, it appears that the whole of the evolution had already reached its conclusion by 194850; the IS. Dell, "Economic Integration and the American Example," Economic Journal, 1959, po 47, A table showing Deflls main findings is reproduced at the enda subsequent years witness a noticeable constancy in the magnitude of the gap0 The bulk of the equalisation process may therefore be located in the period 1935-45, that is, during the years of the New Deal and of World War II Of course this particular dating in itself does not imply that the process was due to such particular events and was not a long-term phenomenon of regional equalisation, The closing of the gap was coupled with a radical change in the shape of the distribution. This can be best appreciated by looking at Figure 1, where the two frequency distributions for 1929 and for 1957 are plotted The reduction of all figures to percentages, which was a necessity in order to make the shapes of the two distributions comparable, also eliminates the shift to the right caused by the general increase in incomes between the two years0 Considering the shape of the distribution in itself, it will be noticed how it changes from a bell-shaped to an almost square distribution in 1957* other words, there are now fewer In people in the low income regions but there are relatively more in the very high income areas, while the mid-income regions have grown numerically smaller0 The magnitude of this evolution is quantified in the figures of Table 2, reflecting the changes in the relative weights of the extreme income classes: Table 2 Percentages of the whole population living in States with incomes as indicated 1929 1955 1957 States with income lower than 1/3 of maximum 150 none none States with income lower than 1/2 of maximum 34j9 130 12c0 States with income higher than 2/3 of maximum 47o7 6401 614 District of Columbia disregarded -- 4 - If one could synthesise in one sentence the change occurred, one should say that, while all regions have improved, the poor areas have experienced greater improvements than the rich ones and this has been responsible for the narrowing of the gap0 At the same time, more people have moved into higher income brackets than have moved out of high into higher brackets which has caused a concentration in the high levels of income, as compared with a concentration around the mid-leve2s typical of 1929o The existence of a siseable tendency towards equalisation, is on the whole, unquestionableo 2o In spite of all this, the view has been expressed that "what is remarkable about the gap is not that it was reduced from 1880 to 1950 but that it lasted so long In the face of competitive forces prevailing in the most dynamic economy in the Western World," This kind of consideration, coupled with the fact that the narrowing of the gap seems to have come to a halt after 1950, justifies a more careful consideration of regional income differentials. In the first place, a preliminary doubt should be solved, namely, how far differentials in money incomes are true reflections of differentials in real incomes. Unfortunately, no indexes showing variations in the price level from State to State seem to be available0 Still some conclusion on this point can be drawn from the work of Hurwits and Stalling, showing separate price indexes for each of the 48 States for each year from 1929 to 1953.2 These indexes, and the figures for "real" per capita incomes computed on their basis, do not add any definite information as to differentials in real income in any particular year: they only show the -change of real income over time0 Therefore, the only information they add to our knowledge of differentials is that they tell us whether differentials in real terms decreased (or increased) over the period considered, less (or more) than 18. Dell, "Economic Integration and the American Example," Economic Journal, 1959, pro 39-54o 2Ao Hurwits and C. Stallings, "Inte-regional Differentials in Per Capita Real Income Change," in Regional Income, Studies in Income and Wealth, volo 21, published by the National Bureau of Economic Research, Princeton, 1957, ppo 1952190 shown by the undeflated figures0 The conclusion, however, is that variations in price levels were not of sufficient magnitude to shift the relative positions of the various States0 An inspection of the price indexes as computed by the two authors suggests, if any, the impression that the movements shown by the raw figures somewhat overstate the extent of the change in real terms. This is true both of the gain achieved by the poorer States in the thirties (that seems to be smaller in real than in monetary terms)-, as of the stationary situation of the post-war period, that considering the slightly higher price index of the South, might turn out to be, in real terms, a small retrocession for the low-income regions. Anyhow, the differences are so small, particularly in the later years, that an analysis of the undeflated data will be sufficient to outline the broader tendencies0 A rough subdivision of income into the two broad categories of farm and nonfarm income, supplies some additional information on this point. Unfortunately, 2 for a number of reasons, the figures for farm and non-farm employment do not exactly coincide in coverage and definitions, so that, rigourously speaking, the figures for farm and non-farm income per worker are not comparableo However, since our main interest here is not in absolute divergencies between the two sectors but in regional comparisons, we shall suppose, for the purposes of this paper, that differences in the definition of farm and non-farm labor force affect the various States different3y and, consequently, we shall make use of the available figures, in spite of formal discrepancies0 A look at the Figures in Table 3 will disclose that the main cause of regional differentials in income per head lies in regional differentials in farm income lIn the years 1935-37 the price index for the north-eastern region 100) was around 63, for the south-eastern States around 58. In (1947-49 the period 1951-53, the same indexes for the same regions were 111 and 113 respectively0 2 The reasons for non-comparability are given at the end where the sources of data are listed, per worker, Differentials in the all comprehensive non-farm sector are very narrow9 while the big gap in regional incomes appears to be present in the agricultural sector: Table 3 Farm vs. non-farm income differentials 1954 Personal income per worker Personal income per head non-farm farm l1 USAo 100 100 100 2. Richest State 205 118 130 3. Poorest State 38 67 49 5o50 lo76 4. Ratio of 2. to 3o 2472 Non-farm income per worker in 1954 oscillates between 5:,6 and 302 thousand dollars, the richest state being New Jersey (followed by Delaware, Connecticut, and Michigan), and the poorest State being South Carolina (preceded by North Carolina, Mississippi and Arkansas). However, differentials in non-agricultural sectors don 9 t seem to play a big role as causes of differentials in total personal income. income, The main factor seems to lie in differentials in farm If income outside agriculture is roughly (or at least tolerably) equalized throughout the country and still there are discrepancies in total income per capita, the inference should follow that these are due to the fact that in some areas there is a wide discrepancy between agricultural and non-agricultural incomes, If this is correct, the consequence follows that the problem is not so much one of rgonal differentials but rather one of sectoral discrepancies between agriculture and the other sectors, The nature of the problem seems, therefore, to call for an analysis of intersectoral differentials in incomes per worker, 3* Table 4 supplies some material for such an analysis. table suggests a few comments 0 Inspection of this Nowhere farm income equals non-farm income (subject to the reservations already mentioned concerning comparability of farm and non-farm employment figures). As can be seen from column 4, in all States the ratio-of farm to non farm is under 100. In the States where equalisation between the two sectors is the highest, the ratio reaches a value of just over 75 (Iowa and Arizona); but in other States, where the gap is wider, the ratio is as low as 16 or 20 (Maine, Michigan, Tennessee, Alabama)o The fact that the ratio is constantly under 100 should cause no surprise; in all countries we know of, average product per worker is lower in agriculture than elsewhere. Even in the countries of the world where it is the highest (Great Britain, Denmark, the Netherlands, and Australia) the ratio of farm to non-farm income per worker is about 75 to J 1 In the United States, however, a similar ratio only obtains in a few exceptional States and this explains why the overall ratio of agricultural to non-agricultural incomes per worker is as low in the U.S.A., as in the majority of both developed and underdeveloped countries0 If we plot personal income per head against the ratio of farm to non-farm income, the resulting diagram (Figure 2) shows no definite correlation The ensuing conclusion that inequalities between the two sectors can be just as high in poor and traditionally backward regions as in highly industrialised and progressed States may sound rather surprising0 It becomes less surprising and lends itself to interpretation, if we consider that the anomaly is more apparent than real, Rich States with marked differentials, such as Maine, New Hampshire, Vermont, Massachusetts, are all States where the agricultural sector is very small (in terms of active population engaged in it); while States with a moderate income per head where the gap between the two sectors is narrow, such as Iowa or Arizona, are all States where agriculture is lIn the majority of countries the ratio is of about 45-50 to l00o Table 4 Farm and non-farm income per worker Farm income State pOwO 1954 Ratio of Non-Farm income pvo. farm to non- farm Income Uo0S0 dol.lars UoS.AQ 1,569 4,764 33 Maine New Hampshire Vermont Massachusetts RhodeIsland Connecticut 605 1,17 1,094 1,864 29507 2,323 3,841 4075 4,048 4,432 4,034 16 24 27 32 62 New York New Jersey Pennsylvania 19286 29072 1,126 5,63 4,553 Ohio Indiana Illinois Michigan Wisconsin 2,048 2,516 3,034 1,151 1,394 4i912 4685 5,Olo 5-279 4,662 Minnesota Iowa Missouri North Dakota South Dakota Nebraska Kansas 1,776 3,323 1,561 1,159 2,116 2,506 2,025 4,494 4,355 4,432 2,988 3,818 4,085 Delaware Maryland Virginia West Virginia North Carolina South Carolina Georgia Florida 1,643 1,470 1,161 1,003 1,215 750 1,042 3,082 5,600 4.531 3,732 4,220 3,468 3,201 3,592 4,457 29 30 31 24 35 23 30 69 Kentucky Tennessee Albama Mississippi 1,313 DO 762 -157 4,229 3,717 3,497 3,229 31 20 22 23 Arkansas Louisiana Oklahoma Texas 862 820 l4057 1,418 3,497 4,O30 4,200 4512 25 20 25 31 5,316 44 4i934 26 37 25 4,443 42 54 61 22 30 41 76 35 29 55 61 46 Table 4 (continued) Ratio of State Montana Idaho Wyoming colorado New Mexioo Arizona Utah Farm income POW 3i179 14790 l$365 1,523 3,567 1,231, Pow Non..Farm income POW 0 poW 0 U.S. dollars L,510 4,328 4,5,5 .439 4$504 3,977 4683 3,780 farm to nonfarm inone taz' ipome 70 35 40 30 38 ?? 33 Nevada 3,00 5,288 57 Washington Oregon California 2,441 1,673 2,873 4,835 4,924 50 34 54 51306 a 0Loa particularly rich (in terms of product per worker). This means that in highly progressed regions there may be a small "residual" of poor agriculture, while elsewhere a very rich agriculture can reduce the gap without actually bringing the State to a very high rank as to income per heado Moreover, it will be noticed from Figure 2, that if we leave out of consideration these two sets of "exceptional cases." in the U.S., there seems to appear a positive correlation between income per head and inter-sectoral differentials, in the sense that the gap tends to become narrower as income per head rises0 It can be interesting to notice that there appears here to be present, at the internal level, a correlation that is conspicuously absent when the analysis is p3rformed at the interaional level, by comparing farm and non-faru incomes in the various countries of the worl4d On the other hand, a definite and by no means surprising correlation appears to be present between product per worker in agriculture and the ratio of farm to non-farm income in the sense that the ratio grows higher (the gap tends to close) the higher labor productivity in agriculture (Figure 3). Which is, after all, only a different way of stating the already noted fact,, that differentials outside agriculture do not play any great role in the story, and that equalization in regional incomes can only bei reached by raising the level of agricultural relative to non-agricultural incomes. That is, as already mentioned, the problem of regional differentials is easentially a consequence of the existence of sectoral differentialso 4o The immediate consequence of this conclusion is that if over the last thirty years regional differential in income per head were reduced (as we aw- they were) the cause of this movement should be found in the narrowing of regional - 1 - differentials within the agricultural sectors. It can therefore be worth while looking at the evolution of farm Incomes per head over the same period, If the hypothesis is correct, we should find that the dispersion of regional farm incomes shows a decreasing range over timeo Again we are confronted with a statistical difficulty, in that the various Censuses of Agriculture were carried out on the basis of different 'oriteria, so that the data for farm labor in the various years are not strictly comparable. Again, in order to proceed, we must relj on the assumption that differences in definition do not affect the various States in different proportions, so that a comparison of the relative positions of the various States over time is still legitimate0 A summary view of the change occured in the regional distribution of agricultural incomes is given in Figure 4, where the distribution is plotted for the years 1930 and 1954 (1954 being the year of the most recent Census of Agriculture)o The relevant figures are shown in Table 5: Table 5 Farm income per worker (national average - 100) 1930 1935 1945 1950 1954 1. Richest State 240 220 295 284 225 2. Poorest State 40 40 24 47 38 61o 55 120 6,o 6o2 L.5 5o4 20 68 69 3* Ratio of 1. to 2o 4k Percentage of total population living in States with income per head higher than double of national average l12 The range of the distribution measured by the ratio between the extreme incomes (row 3) show a remarkable constancy: the only exception is the year 1945, and is due to an abnormally high agricultural income in the State of California (disregarding California, the ratio in that year would be equal to h1). On the other hand a definite change seems to have taken place in the shape of the distribution, as synthesized by the percentages in row 4 of Table 5o The relative number of people in the highest income brackets has definitely decreased between 1930 and 1954, which means a higher concentration of incomes around the average, with less people in the "tails," even if the tails are just as far apart as they were in the 19308s, However, if we look at the trend of the evolution over time, we notice that the downward tendency was stopped and reversed sometime between 1945 and 1950, as if the process of regional equalization in agricultural incomes had been brought to a halt at the end of the waro It will be recalled that the same trend with a similar reversal at about the same date was noticed in the analysis of regional differentials in per capita incomes; which is once more a confirmation of the dependence of regional differentials on differentials in agriculture0 5. Given the fact that a certain degree of equalization was reached among per capita incomes in the various States, two more questions arise: process of convergence realised? and: how was the is this process a part of a steady trend, or is it the product of occasional forces that need not perpetuate in the future? Let us consider one question at a time, First of all, what forces have been responsible for the closing of the gap? Obviously such factors should be found among those affecting the demand and supply of labor in the various areas, One first cause could have been geographical shifts in industrial location, such as to favour low income regions more than high - 13 - income regions, In the case of agriculture, shifts in the location of production favored sometimes rich sometimes poor areas and no definite conclusion can be drawn. As for the manufacturing sectors, an examination of a number of large manufacturing industries was performed by R.A. Easterlin and the results show that only in some cases changes in geographical distribution were definitely in favour of backward areas0 2 The most remarkable of these was the shift of textile manufacturers from the Northeast to the South, alongside with similar shifts in the manufactures of tobacco products, furniture, marble, granite, food products0 Many more regional shifts were registered over the relevant period (iron and steel, metal products, chemical industries), but they either were at the expense of poor regions or, even if at the expense of high income areas, benefited other high income areas, so that they exerted no effect on the convergence of regional incomes0 More than geographical shifts in industries, the general evolution in the composition of the national product may have contributed to the reduction of inequalities, The decline in the relative weight of food and clothing, for instance, should have favored the shift of resources from agriculture to industry and, therefore, from low to high income activities. The increasing importance of service output should have worked substantially in the same direction. Both hypotheses agree with empirical researches of F.A. Hanna showing that variat'ions in the occupational composition explain 80 per cent of variations in reported State earnings 0 ' 1 Bureau of the Census, U.S. Census of Agriculture, 1950, General Report, Vol 0 II, po 401, 425o 2 RoA. Easterlin, "Long-term Regional Income Changes: Some Suggested Factors," in The Regional Science Association, Papers and Proceedings, vol. IV, pp. 313-325o 3F.A. Hanna, "An analysis of interstate income differentials: theory and practice," in Regional Income, Studies in Income and Wealth, vol 0 21, published by the National Bureau of Economic Research, Princeton, 1957, po 1240 - 14 - Another equalising factor, according to traditional economic theory, should consist in migration of labor 0 Once more the relevant data are supplied by R.A. Easterlin.I As Table 6 shows, between 1880 and 1950 a substantial flow of labor from poor to rich areas did occur* All southern areas were regions of high out-migration, while all rich areas (north-eastern States and Pacific) were regions of net immigration The persistency of this tendency over the whole period shows that this was in fact mne of the major forces, alongside with change in the productive structures, malding for the reduction in income differentials. Table6 Net jaigration into each region during specified period (both internal and international migration) (% of population in initial year of each period) 1920-19502 1880-1900 1900-1920 New England 247 161L Middle Atlantic l9o2 18,6 6 7 East-North Central 9.09 1743 540 West-North Central 1703 -648 -12o2 South Atlantic -8o6 -448 -5o6 East-South Central -12o2 -17,2 -15o6 West-South Central 28o7 1009 -7,8 Mountain 86,0 53.9 -10 Pacific 798 1o4,3 1 R.A. 6745 Easterlin, op cito, po 322o 0 reasons of comparability change in this period is expressed as average rate per 20 years9 2For -o15 One might think that the process should have gone much further than it did, considering that the conditions of mobility of factors and products were almost ideal all the time: absence of internal customs, complete freedom of internal migration, no restrictions to capital movements 0 The answer, if one can be attempted, would perhaps be that while the equalizing forces considered by the static theory of general equilibrium did work in the right direction, other forces of dynamical nature were making for increasing instead of decreasing regional differentialso The development of new industries, such as the rapid growth of the automobile industry, and others connected with it (such as tires and glass), the increasing importance of the alecraft industry, the expansion of electrical manufactures, may have favoured already advanced regions rather than the poor ones, The only technical changes that seem to have favoured the South could be the introduction of synthetic textiles, and the developments in the field of petrochemical products. If these hypotheses are not complete3y ill-founded, they might help to explain how, in a strongly dynamical setting, where the forces of innovation were working in the direction of greater inequality, the equalizing forces of trade and migration failed to produce a greater result than they actually dido Much less can be said as to the question regarding the continuity of the equalization process. As it was noticed earlier, the process seems to have come to a halt in the last years, The supposition has, however, been advanced that this may be due to short-term factore, apt to obscure but not to reverse the basic trend0 1 The post-war decline in farm incomes should be attributed to forces of this nature0 Given the shortness of the period, no safe conclusion can be reached an this point 0 1C0 F* Schwartz and R.Eo Graham, Personal Income by States, U0 S0 Department of Commerce, Office of Business Economics, Washington, 1956, p. 28, 6. By way of a sutanary we can say: regional differentials in per capita incomes are still existing and siseable in the U.S.Ao; in 1957 the ratio of p.c. incomes in the richest and poorest State was of 3 to 1; - such differentials as exist are mainly due to differentials between farm and non-farm income, these being particularly pronounced in a number of States, which are not necessarily agricultural nor necessarily low-income States; - the measure of the gap between rich and poor regions is much smaller today than it was 30 years ago; - this evolution towards equalisation has been mainly achieved through a change in the occupational structure (less peoRle in agriculture and more in the industrial and tertiary activities) and through substantial migrations from poor to rich areas; - the more recent years seem to witness a halt in the process of equalisation; however, there are no sufficient elements to judge whether this is a shortterm phenomenon, or a reversal of a long-term trend0 - 17 - Sources: UoSc Department of Commerce, Bureau of the Census, U.S. Censuses of Population for the years 1930 and 1950; UoSo Department of Conmerce, Bureau of the Census, U.S. Censuses of Agricultre for the years 1935, 1945, 1954; U.So Department of Comearce, Office of Business Economics, .Personal Income by States, 19291955, by CaF Schwartz and R.E. Graham, Washington, 1956; - U0 S0 Department of Commerce, Office of Business Economics, U.S. Income and Output, Washington, 1959, The reasons for non-comparability between the data for farm and non-farm employment (referred t6 on page 5) can be deduced from the Census of A for 195%, vol. II, General Report, po 234, and are mainly the (i) the data were tabulated from two different sources0 The occupa. tion and industry statistics were tabulated from information reported on the Census of Population Questionnaire, while the number of persons working on farms were tabulated from the Census of AgrieurLuure uesvuonnaireo At no time were the questionnaires checked one with the other for these data; (ii) in the occupation and industry statistics, persons were allocated to a particular category on the basis of the jobs at which they worked the greatest number 'of- hours during the week preceding enumeration; in the Agriculture Census, persons were reported as working on the farm if they worked the stated minimum hours or more of the week, regardless of the hours spent at other employment; (iii) in the occupation and industry statistics, only persons 14 years old and over were included; in the Agriculture Census there was no specified age limit for persons reported as working on farms; (iv) the detailed occupation and industry groups used in classifying workers as "agricultural" in the Census of Population are not identical with those used in the Census of Agriculture. The reasons for non-comparability among the data of the various Censuses of Agriculture can be deduced from the same source and are mainly the following: (i) the 1954 Census of Agriculture, taken in October and November, was the first nation-wide Census to be taken in the fall 9f the year (the previous Censuses were taken in January; the change was introduced "upon recommendation of the principal users of farm-labor data"), The number of persons reported as working on farms during the specified week in 1954 represents in many areas the maximum number of persons employed in agriculture during the year; this, of course, is.not true of the previous Censuses; (ii) in the 1954 Census, the minimum weekly hours of employment at form for a worker to be considered as "agricultural" were as followas (a) members of operators family: 15 (b) hired workers: any; in the 1945 and 1935 Censuses, the minimum weekly employment at farm was two d~ai for all kinds of workers, (iii) the minimum age of workers was unspecified in all Censuses, except in the 1945 Census where it was fixed at 14 years. - 18 - The table by S. Dell referred to in the text (p. 2 footnote 1) is the following: Regional Per Capita Income as Percentage of National Ievel 1880 1900 1920 1930 1940 1950 United States 100 100 100 100 100 100 New England Middle Atlantic 141 141 134 139 124 134 East North Central West North Central 129 140 121 124 109 116 102 90 106 97 108 87 111 82 112 84 112 94 72 100 135 48 61 83 130 South Atlantic East South Central West South Central Mountain Pacific 45 ' 45 60 168 204 49 61 139 163 51 59 52 56 .69 55 70 90 138 74 62 80 96 121 Arithmetic mean deviation- of regional per capita income from national level, percentage points i46. 31.1 .20 16.9 Figure 1 Personal income 1929 18 Number of recipients (% of total population) 14) 10 6 2 Personal income per capita (national average a 100) 1957 Number of recipients (N of total population) 3O 26 22 18 1& 10 6 2 Personal income per capita (national average - 100) Figure 2 a * * o45 e e , e e #e e e e e e 0 *15 5 500 1000 1 1500 2000 2 2500 Personal Income Per Capita Figure 3 * I I~ El o ipg I g i ee . @5 e 5 500 io00 15S %o 25 )0 3cM Farm personal income per worker 350 Figure 4 Number of workers in States with average income indicated 22 1930 (%of total farm labor force) 18 14 6 2 TI itI -- I - A 0- 20 50 100 114180 220 Farm income per worker (national average - 100) Number of workers living in States with average income indicated (%of total farm population) .30 26 22 18 14 10 6 2 Farm income per worker (national average - 100)