New federal statistics that adjust personal income by the real cost of living in different cities or regions show Michigan is losing ground to other states.
Michigan’s “real per capita income” in the new measure was $38,317 in 2012, the most recent year available. That’s up 1.5 percent from $37,751 in 2011 with Michigan’s growth rate matching the national rate.
Despite the rise, the state’s ranking fell from 38th in 2011 to 39th in 2012 in terms of how far a paycheck will stretch in Michigan, just below Georgia. Michigan’s per capita income, and income growth also was the lowest among Great Lakes states in 2012.
“It doesn’t change the fundamental picture,” Michigan State University economist Charles Ballard said of the data, put out by the U.S. Bureau of Economic Analysis (BEA). “The fundamental picture now is that we are a somewhat-below-average income state.”
Within Michigan, real per capita incomes in the Midland, Detroit, Ann Arbor and Benton Harbor metro areas exceeded that of the state.
Ballard and other experts say adjusting incomes for living costs in different regions and metropolitan areas gives economists, residents and businesses a better idea of how much money it takes to support a family in different areas.
“For the first time, Americans looking to move or take a job anywhere in the country can compare inflation-adjusted incomes across states and metropolitan areas to better understand how their personal income may be affected by a job change or move,” U.S. Commerce Secretary Penny Pritzker said in a statement.
And businesses considering relocating or building new plants “now have a comprehensive and consistent measure of differences in the cost of living and the purchasing power of consumers nationwide,” she said.
The BEA analysis uses what it called “regional price parities” to account for regional differences in the prices of goods and services, along with a second measure, a Personal Consumption Expenditure index, which measures national price changes over time.
Michigan had an RPP of 94.4 in 2012, meaning that living costs in the state were 5.6 percent lower than the United States as a whole. The state ranked 28th in living costs in 2012.
The prices of goods and services in Michigan were roughly 3 percentage points above the state’s overall RPP, but rents were significantly lower – 7.6 percentage points below the U.S. average in 2012.
“I think this idea that you need to make an adjustment for cost-of-living differences is really important,” said University of Michigan economist Don Grimes.
While states such as California, Massachusetts and New York boast among the highest personal incomes in the country, living costs can eat up a big chunk of those higher paychecks.
Personal per capita income in California, for example, in 2012 was $46,477. But after adjusting for living costs, income there fell to $38,888, just $571 above Michigan’s personal income.
Michigan’s per capita income – that is, total personal income in the state divided by population – rose slightly after adjusting for inflation and the cost of living, from $38,291, to $38,317 in 2012.
The BEA also calculated real personal income for the nation’s 381 metropolitan areas, including 14 in Michigan. NPR has a fun graphic to explore how most metro areas fared.
The Ann Arbor, Detroit, Midland and Niles-Benton Harbor metro areas exceeded the state average in real per capita income in 2012. Income in the Grand Rapids-Wyoming metro area was just slightly below the state average at $38,293.
The rest of the state’s metro areas had incomes below the state average in 2012. But a strong manufacturing recovery boosted income growth rates above the state average in most of the metro areas.
Real personal income growth fell below the state average in Niles-Benton Harbor, Jackson, Kalamazoo-Portage, Lansing-East Lansing and Midland. Incomes in Lansing-East Lansing and Midland actually dropped slightly in 2012, as wages failed to keep up with living costs.
Local economic developers say they’re studying the new data, released in April, to determine how they might use it to attract new businesses and residents. Several said because the statistics are so new, it will take time to know how effective the data will be for them.
“Any tools that help us attract businesses and talent is certainly something we’re going to take a look at,” said Greg LaMarr, a spokesman at Saginaw Future, a local economic development agency.
Economic developers have long known that living costs across regions drive business and talent location decisions. But comparing those costs by state and metropolitan regions hasn’t always been easy.
Now developers have an authoritative source to point to in seeking business investment and workers, LaMarr said.
Why people move
But economists warn that these statistics are only one factor among many that drive how people and businesses make moving decisions. People decide where they want to live and businesses choose where they want to locate for a variety of reasons that go well beyond the cost of living, they say.
“For example, in making household location decisions, a high quality of life might easily offset low real wages, and in making business location decisions, high worker productivity due to good schools or other factors might offset high wages and prices,” Tim Bartik, senior economist at the W.E. Upjohn Institute for Employment Research, wrote in an email.
Ballard said a software engineer who has been offered a job at Google in California likely would find it attractive, even though Silicon Valley has one of the highest living costs in the country.
“Why would anyone consider moving to San Jose? Ballard said. “It’s the world capital of high-tech research and production.”
Young, college-educated “millennials”—the ones Michigan is trying to attract and retain—are flocking to cities such as Chicago, New York and San Francisco, even though it costs far more to live in those places than in Detroit, Grand Rapids and Lansing.
Weather, family, recreational opportunities and other quality of life issues also play a large role in where people decide to live, economists say.
“If it was just driven by wages, everybody would move to Connecticut and Massachusetts,” Grimes said.
Those two states rank third and fifth, respectively, in real personal income.
Southern states have touted their lower living costs and less regulation as offsets to generally lower incomes than other parts of the country in attracting businesses.
For instance, real per capita income in Alabama of $38,530 in 2012 slightly exceeded Michigan’s per person income of $38,317. But Alabama had the third-lowest cost of living in the country in 2012, 6.3 percentage points below Michigan’s living costs.
Alabama’s low cost of living added $2,604 to its real per capita income in 2012, according to the BEA data.
Economists say just knowing what incomes and living costs are across the country might not have much impact on upward mobility, an important economic growth factor that has lagged since the Great Recession.
“If you’re in a low-income place and your house doesn’t appreciate, you really can’t go up,” Grimes said. “If you have a house that’s worth $100,000, you’re never going to get to Manhattan.”