Thursday, January 28, 2016

Montana 49th in Wages? Not Exactly.

This Sunday, you’ll get to watch Republican gubernatorial candidate Greg Gianforte face off with me and Mike Dennison in the MTN studios on Face the State. I'll post a link once it has been uploaded. This is the first time I’ve interacted with Mr. Gianforte extensively, and I thoroughly enjoyed our conversation. It should be an exciting race.
Greg Gianforte: Founder of RightNow Technologies and Republican candidate for Governor

During the show, you’ll hear me express skepticism about Mr. Gianforte’s claim that Montana is 49th in wages. I wanted to provide some context for that discussion, and explain why I don’t think this number is a particularly good measure of Montana’s overall economic health--and how I think it undercuts the argument being made by Mr. Gianforte.

As a political scientist, I like quantitative data. At the same time, when we use quantitative data, it is important to know how the data are calculated and the potential ways in which that calculation can introduce bias into our measures. It is true that Montana is not as economically well-off as other states. But are we really only better than Mississippi? I found that hard to believe. Here are three other measures of the economy and how Montana ranks:

U.S. Census
Per Capita Household Income (2014): 38th
Per Capita Income (2014): 34th

Bureau of Labor Statistics
Unemployment (November 2015): Tied for 12th (with Kansas)

Not first or even in the top half for per capita or household income, but not nearly rock bottom as the 49th in wages number suggests. And the unemployment picture is stellar. So what gives? Do we really have such low pay?

Back in April, many Montana media outlets reported that according to tax data compiled by Transactional Records Access Clearinghouse (TRAC), Montana was 49th in wages. No one took any time, however, to actually do a deep dig into that number. Once I heard Gianforte using the number repeatedly during his statewide announcement tour, I decided to do exactly that. 

I clicked on the methodology portion of the website, reading carefully about how the wage number is calculated. TRAC took the aggregate total of wage and salary-based income as reported on individual tax returns and divided that number by the number of tax returns received from the state. That led to the determination that at $33,180, Montana is 49th in average wages—just above Mississippi.

But there are two problems with this method. First, consider that some people derive no income from wages in a tax year. Some of these people are retired, some are students, and others live off of capital gains or other sources of passive income. Yet, these folks need to file a tax return—but are included in the data to compute the wage average despite having zero wages. This will serve to drag down the average wages. You might argue that this is the case in every state—and that’s true. But, if a state skews older (which Montana does) or has a high number of retirees receiving income from passive investments (see Big Sky, for example), then this biases the wage average downward. 

(In fact, Florida, New Mexico, West Virginia, South Dakota, Arkansas, and Maine are all at the bottom 11 and they are some of the oldest states in the US) 

Second, consider the nature of Montana’s economy. In 2015, we ranked number 1 (and, indeed, have been number 1 for quite some time) in the Kauffman Index of Startups. Put simply, we are a state full of small businesses and sole proprietorships—with people eager and willing to take risks. Many farmers, ranchers, telecommuters, tax accountants, consultants, plumbers, tradespeople and the like do not report W2 wage income either. I know this because for many years my wife was a consultant and she had no W2 income. Instead, all of her income was reported as business income—a separate line of a 1040 form. That means that many Montanans, who had good jobs, also report zero on the W2 line of their 1040s. And, that means they drag down the state’s wage average, too. Again, this is a double hit. Their income is included as zero AND they their tax return is included in the denominator for the overall wage average.

I argue this number very poorly reflects on the state of Montana’s job picture and I am skeptical of its use. There is no doubt in my mind that Montana can have a stronger economy and there’s a path for an even better future for our state. That’s a debate we need to have in this Governor’s race. But it is important, while having a conversation about that future, that we use the best numbers to decide what policies we need to pursue to keep Montana the Last (but not 49th), Best Place.