INTRODUCTION
Labor Income represents the total value of all forms of employment-based income paid to Households by a given Industry or throughout a defined economy during a specified period of time. It reflects the combined cost of total payroll paid to employees (e.g. wages and salaries, supplements to wages, payroll taxes), otherwise known as Employee Compensation (EC), and payments received by self-employed individuals and unincorporated business owners across the defined economy, known as Proprietor Income (PI).
IMPLAN develops estimates of Labor Income (and the components of Labor Income: EC and PI) by Industry for every zip code, county, and state in the U.S. As no one data source provides enough information to capture Labor Income at this level of specificity (both geographically and sectorally), IMPLAN uses a number of data sources to generate EC and PI estimates.
Labor Income is paid to Households and is a source of funds through which Households can spend on consumer goods and services. In an Economic Impact Analysis, Labor Income generates Induced Effects via the spending by local residents that are employed by the Direct business or businesses. The assumption is that the more income that Households earn, the more money those Households spend. Additionally, the local residents employed by the Indirect businesses also generate Induced Effects due to their Household spending.
This article describes Labor Income within the context of the production function, briefly discusses the data sources, and highlights how Labor Income is incorporated in Economic Impact Analysis.
A COMPONENT OF THE INDUSTRY PRODUCTION FUNCTION
The production function of an industry in IMPLAN determines how an Industry will allocate Output to continue to operate. To complete each Industry’s production function, the Industry needs Intermediate Inputs and additional factors called Value Added. The combination of an Industry’s spending on Value Added and Intermediate Inputs equals the Industry’s Total Output.
Labor Income is a component of Value Added. It is the sum of Employee Compensation (EC) and Proprietor Income (PI).
Employee Compensation (EC) is the total payroll cost of wage and salary employees to the employer and is also referred to as fully-loaded payroll. EC is place-of-work based, meaning that the wages and salaries that are paid to employees are accounted for in the region where the employees work, regardless of where those employees live.
Proprietor Income (PI) consists of payments received by self-employed individuals and unincorporated business owners. More specifically, it represents the current-production income of sole proprietorships, partnerships, and tax-exempt cooperatives. It includes the capital consumption allowance and is recorded on Federal Tax form 1040C. It excludes dividends, monetary interest received by nonfinancial business, and rental income received by persons not primarily engaged in the real estate business. In contrast to EC, PI is place-of-residence based. This means that all PI is accounted for in the region where the proprietor lives.
Because Proprietor Income can be negative, Labor Income can be negative if the negative Proprietor Income is larger in magnitude than the positive Employee Compensation in that industry or economy in that year.
HOW IS IT CALCULATED?
While Labor Income represents the total value of all employment income paid throughout an economy, Proprietor Income and Employee Compensation help us delineate between types of income more precisely. Specifically, Proprietor Income represents the value of payments received by any self-employed individuals and/or unincorporated business owners, and Employee Compensation represents the fully-loaded value of all payroll paid to any employees. So, Labor Income (LI) values represent the collective cost of both Proprietor Income and Employee Compensation.
Labor Income contains two pieces:
And those two pieces are part of Output:
MEASURING LABOR INCOME
Source data on Labor Income (and its components) are inherently incomplete. Differences in raw data source coverage, level of detail, data collection methods, and data release timing result in no one data source providing enough geographic and Industry-detail for an IMPLAN dataset. Of particular concern are non-disclosed data (which has not been disclosed by government agencies to protect the privacy of individual businesses) and undercoverage. IMPLAN’s Labor Income data, therefore, come from a variety of sources and IMPLAN employs several approaches to estimate non-disclosed values and adjust for undercoverage. More information about these data sources can be found in Employment and Labor Income Data.
LABOR INCOME IN ECONOMIC IMPACT ANALYSIS
As mentioned previously, Labor Income generates Induced Effects via the household spending by local residents that are employed by the Direct and Indirect business or businesses. Note, however, that IMPLAN does not assume that 100% of this Labor Income is spent, nor that 100% is spent locally. IMPLAN removes payroll taxes, personal income taxes, savings, in-commuter income, and non-local purchases before spending the rest locally. These leakages and expenditures are based on information in the region’s Social Accounting Matrix (SAM). Read more about Estimating Household Income and Expenditures.
For example, while payroll taxes are paid in the place of employment, personal income taxes on that same income are paid in the place of residence, and these two places differ for commuters. Additionally, household spending is generated at the location of the household (that is, at the employee’s place of residence). Therefore, a proper measure of regional and inter-regional Induced Effects requires accounting for these inter-regional flows of employment-based income. IMPLAN derives region specific commuting flows as described below in Estimating Commuter Employee Compensation.
RELATED ARTICLES
Employment and Labor Income Data
Accounting for Non-Disclosures, Exclusions, and Undercoverage in Employment Data
Estimating Household Income and Expenditures
Income Data Sources: Personal Income vs. Money Income
Updated July 29, 2024