You Decide: How have the economic pie and its slices changed?

Published 7:47 am Wednesday, December 15, 2021

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By Dr. Mike Walden

With the holiday season upon us, it is appropriate that pie is on my mind. Incidentally, my favorite is lemon meringue. But today’s column is about a different kind of pie – the economic pie.

Economic pie is a term often used to describe the size of the economy. Over time, economists and others track how the economic pie is growing. The slices of the pie then refer to how individuals share in the aggregate economy and its changing size. Is everyone’s slice increasing, or do some people get bigger slices while others are stuck with smaller slices. The formal term for the slices is “income distribution.”

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These two concepts – economic growth and income distribution – are at the heart of many of our policy debates about topics such as taxes, regulations, government spending and financial support for households and businesses. Often in these discussions some groups will put more importance on economic growth, while others will consider income distribution to be the dominant concern.

But before we can examine and debate economic growth and income distribution, we have to have good measures of them. Recently, I took on the task of developing such measures for North Carolina.

I developed an index of economic growth in the state based on three individual measures: the growth rate in the value of total production of goods and services (“GDP” for technical readers), the growth rate in income per person and the growth rate in jobs. The first two measures are adjusted for inflation so they are calibrated in dollars of equal purchasing power over time.

Generating an index of income distribution was more complex. First, I divided the industries where people work into three groups: high-paying, middle-paying and low-paying. Fortunately, there was consistency in the groupings over time. From these groups I created an index based on several measures comparing the average earnings in each group and also the number of workers in each group. Increases in the earnings of low-paying and middle-paying workers relative to high-paying workers, as well as increases in the numbers of high-paying and middle-paying workers relative to low-paying workers, were considered to indicate a broadening of the income distribution.

I call the economic growth index for North Carolina, NC-GROWTH, and I dub the state income distribution measure, NC-SHARE. I was able to generate both indices annually from 1997 to 2020.

What do the indices tell us about the growth of North Carolina’s economic pie and the distribution of that pie to high-paying, middle-paying and low-paying workers?

The good news is that NC-GROWTH was positive for 16 of the 24 years from 1997 to 2020.  NC-GROWTH was negative in years close to or during an official recession, such as in the early and late 2000s as well as during 2020, the year of the COVID-19 recession.

The findings for NC-SHARE are more complicated. The index fell on trend from 1997 to 2016, due mainly to a shift out of middle-paying jobs to low-paying jobs. However, since 2016 and including 2020, these trends reversed and NC-SHARE rose. There also was a modest increase in the relative earnings of low-paying compared to high-paying jobs in recent years.

The declines in NC-SHARE during 1997-2016 does not imply that the earnings of low-paying jobs were dropping while the earnings of high-paying and middle-paying jobs were climbing. Actually, the average earnings of all three groups rose over the time period, both before and after adjusting for inflation. However, the average earnings of high-paying jobs rose more than the average earnings of the other two groups.

My research revealed another interesting finding having to do with the relationship between the economic growth rate and the distribution of that growth. I found a strong relationship between one of the growth measures – the rate of growth in inflation-adjusted GDP (gross domestic product) and the income distribution index, NC-SHARE. A statistical measure showed over one-third of the changes in GDP and NC-SHARE were related, meaning they moved together (in technical lingo, they are “correlated”). Correlation does not necessarily imply causation, but there are some economists who argue that growing the economy faster is the best way to spread income gains among all workers.

Alternatively, there are other economists who claim the opposite – that spreading income gains among more workers, and particularly those at the lower pay scales, motivate harder and more productive work and therefore a faster growing economic pie.

I won’t solve this disagreement here. But I will say that both economic growth and the distribution of that growth in our state are very important. But is one more important than the other? You decide.

Dr. Mike Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.