PER CAPITA INCOME

Per capita income is the average amount of money each person in a nation makes during the course of a year. It is calculated by dividing national income, which is the sum of all the individual and corporate income arising from a nation's production of goods and services, by the total population of the nation. Per capita real income is the same figure, but adjusted to eliminate changes in prices or purchasing power over time. Many economic terms are commonly divided by population and expressed as per capita, or per person, amounts. Examples include per capita gross national product and per capita savings.

It is important to remember that per capita income figures represent a national average; in reality, income is not distributed evenly among all members of the population. Income varies by geographical region, for example, because the primary source of income in one area might be industry while in another it might be agriculture. For example, Connecticut reported the highest per capita income in the United States in 1997 at $36,263, while Kentucky reported the lowest at $20,657. Another geographical difference is based on the fact that wages tend to be higher in large cities than in small towns or rural areas. Income also tends to differ between individuals with different educational backgrounds.

Due to the difficulties of interpreting per capita income figures within a nation, per capita income is most often used to compare the standard of living in different countries. Per capita income varies greatly around the world, and the gap between relatively poor and relatively rich countries is becoming larger all the time. According to Susan Dentzer in U.S. News and World Report, in 1988 the top 20 percent of countries worldwide (based on annual national income) reported per capita income figures an average of 65 times greater than the bottom 20 percent of countries. In a 1997 article for Forbes, Peter Brimelow found that countries with free-market economic policies tended to have higher per capita income figures than other countries.

In the United States, per capita income for 1997 was $25,598, an increase of 5.7 percent from the previous year. Throughout the 1990s, there were many indications that Americans had more money and were living better than before. Three times as many newly constructed homes contained more than two bathrooms in 1992 than in 1970, for example, while the average square footage of new houses increased by one-third over the same period. In an article for New York, however, Ben Stein argued that such statistics are misleading. After adjusting for inflation, Stein found that per-hour private-sector earnings, excluding agricultural work, rose only .3 percent per year, or 10.6 percent since 1960. In addition, he reported that inflation-adjusted weekly earnings had actually declined by 2 percent since 1959.

Stein attributed the decline in real income in part to the fact that the overall American labor force has increased significantly since the 1950s. An increase in the number of people working means that national and per capita income tends to rise, even though the average income per worker remains the same or declines because it is divided among more people. In addition, Stein noted that the government figures for per capita income growth include nonmonetary benefits received by workers, such as health care and retirement coverage. These payments, which have increased markedly in recent years, tend to inflate per capita income figures and hide underlying trends affecting wages. Other factors Stein found to reduce per capita income growth include fewer people pursuing higher education and companies keeping wages low in order to compete with foreign firms.