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.


Anonymous said...

Interesting assessment, I agree that there are some nuances to the measurement to keep in context but to say it is completely useless? I am not so sure that conclusion follows from your logic or the numbers under scrutiny.

Consider that Montana is 44th in both age and per capita GDP. There are older states who don’t rank as low in the wage study in question. What does this say about our wages? And most of the states who have low GDP, command the bottom end of the low wage study.

Reasonably, economic activity should be lower in states with more retirees. Sure, but that doesn’t explain the whole of it. For example, Connecticut ranks 1st in the TRAC study for wages, and 4th for per cap GDP but also trends older, like Montana (rank 45).

Another ranking that you might find interesting. It co-relates to these issues but tries to take in more variables to take in opportunity is the Human Development index, which also ranks Montana in the mid-40s.

Lastly, there are some confirming studies, although bottom of the pack does not equal ranking in the bottom 10. Rasmussen College pulled together BLS and BEA studies to compare and MT ranks similarly and confirms similar wage rates in relation to other states.

David Parker said...

I don't normally publish anonymous comments, but I thought this comment was useful because it makes some excellent points.

David Parker said...

Good point about CT, which ranks 1 in wages. Also, it ranked 35th on the Kauffman Index. I'd like to see numbers on business income to flesh this out.

David Parker said...

Keep up the conversation! WHERE ARE WE?

gpstberg said...

So if we're not 49th in wages then what place are we?

Ford Hayes said...

CT isn't a fair comparison to MT. Using the Cost of Living calculator at Bankrate, you can see that Hartford is 20.5% more expensive than Bozeman, and the Bridgeport/Stamford area is 41% more expensive than Bozeman. This is the same Bozeman that is roundly criticized for its unaffordable cost of living that is far more expensive than the rest of MT. You also have lots of older working families in CT, because you have to have a high income to afford to live there, but it's close enough to NYC and Boston to commute. An older population is not the same as a retired population. Montana has a population with a bi-modal distribution: It has many young people under 30, and many retirement-aged citizens. CT has a cost of living that is very unfriendly to younger workers and to retirees with only passive income (except those who are incredibly wealthy). This makes it have a higher population of high-earning workers in the latter half of their careers.

Anonymous said...

This article and the comments make many useful points. My husband and I retired to the state of Montana. We have beautiful 1099's, but no wages. Many of my friends in Bozeman came to be near their grandchildren. We refer to ourselves as "trailers," since we trailed after our children and grandchildren.
Two of my sons who file tax in Montana are in grad school and have very low incomes, since their ultimate goal right now is education, not work force. One is on GI Bill. Neither would raise the average wage at this time.
The true measure of how well Montana is doing economically is the unemployment figure. This figure should represent those who are truly looking for a job and have not yet found one. Although we do have those in our state who are "underemployed," individuals with vastly more education than their current job requires, these same people are the ones who get motivated to go out and start their own businesses.
Current politicians should be more concerned about quality and quantity of education available than "average wage," since so many Montanans choose to work for themselves, and not for the average wage!

Dick Barrett said...

Rankings are not really what one should be looking at, After all, even if there was hardly any difference at all in state wage levels ( say a few dollars per year) some state would still be in 49th. place, but it would be meaningless. What is interesting is the actual deviations of wages from average. And when you begin to analyze the sources of those deviations, there are some interesting findings. For example, the difference between wages in Montana and in other states is greater, the higher the level of educational attainment of the group's of workers whose wages are being compared; for high school graduates, for example, there is no difference. Or I'd you make the comparison based on size of place, people living in Montana's cities earn about the same as other Americans living in cities of the same size. It's a little out of date now, but you can see more of this in Post Cowboy Economics - Pay and Prosperity in the New American West, which Tom Power and I published in 2002.

Kent Madin said...

Playing loosey goosey with the data in this case is minor (but not unexpected) from someone who believes that the Earth is 6000 years old, despite the scientific data to the contrary. Will you be addressing today on the show, the question of how Mr. Gianforte will protect Montana's natural resources (and their ability to both enrich our lives and attract good, clean jobs in high tech) when he believes that most of the Natural Sciences upon which policy decisions are based are fraudulent fantasy?

Unknown said...
This comment has been removed by the author.
Unknown said...

Montana is ranked 49th in median individual annual earnings by the U.S. Census Bureau, where earnings are defined as the sum of wage or salary income and net income from self-employment, and the population is persons ages16 years and over with earnings. This is according to Table S2001, EARNINGS IN THE PAST 12 MONTHS (IN 2014 INFLATION-ADJUSTED DOLLARS) 2010-2014 American Community Survey 5-Year Estimates. Please see the following link:

To Dick's point, the difference between Montana's median individual annual earnings ($25,994) and that of the U.S. ($30,815) is quite substantial as a percentage of the Montana total. This seems to be a legitimate and important (if not new) topic. I'd love to hear specifics from either gubernatorial candidate about raising Montanans' earnings.