Understanding Types of Income

Data Team

February 19, 2020 22:16

INTRODUCTION

In IMPLAN, there are five types of income that can be identified: Personal Income, Labor Income, Household Income, disposable income, and household spending. This article breaks down the differences and how IMPLAN data compares to government estimates.

DEFINING INCOME TYPES

First off, let’s define each type of income found in IMPLAN.

PERSONAL INCOME: Total Personal Income in IMPLAN is based on the Bureau of Economic Analysis (BEA) definition of Personal Income. BEA Personal Income includes imputed income, adjustments for misreporting and under-reporting, and employment paid benefits. This is not comparable to money income as defined by the Census Bureau. Personal Income is all household income receipts, except those received from commodity sales and borrowing. Learn more about Income Data Sources: Personal Income vs. Money Income.

LABOR INCOME: 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).

HOUSEHOLD INCOME: Household Income represents the income from all sources received by residents, including total wages & salaries, benefits, interest, dividends, & transfer payments, less all contributions to Social Security/Medicare (payroll taxes). Labor Income less payroll taxes and in-commuting income is included in Household Income in addition to all non-employment sources of Household Income.

DISPOSABLE HOUSEHOLD INCOME: Disposable income is Household Income less personal taxes. Disposable Income is money that is available to be saved or spent.

HOUESHOLD SPENDING: Household spending is what is actually expended by households on goods and services, after removing savings.

UNDERSTANDING THEIR RELATIONSHIP

The relationship between the types of income can be confusing. This infographic shows how each of the income types are related in IMPLAN. Labor Income is one form of income that Households receive. Household Income represents all forms of income received by residents. Household spending is what households actually purchase from their disposable income, after savings are withheld.

WHERE TO FIND INCOME IN IMPLAN

Each of the five types of income can be calculated in an economy using a Region’s Social Accounting Matrix (SAM). The Detailed IxC SAM can be found under Region Details > Social Accounts > IxC Social Accounting Matrix > Detailed IxC SAM.

PERSONAL INCOME

Total Personal Income can be found in IMPLAN in the Region Details > Regions Overview screen.

Personal Income can be calculated by Household Income Group from the Region’s Detailed IxC SAM. From the Household Income column totals, subtract Commodity sales (payments to Household rows by the Commodity column as well as payments to Household, "Commodity Trade" rows by the Foreign Trade column) and borrowing (transfers from the Capital column to the Household, “Borrowing or Saving” rows).

LABOR INCOME

Labor Income can be found in the IMPLAN Region Details in the Study Area Data tab. The two forms of Labor Income, Employee Compensation and Proprietor Income, are provided by Industry within the Industry Detail table. Within the Industry Summary table there is a total Labor Income value by Industry.

In the Social Accounting Matrix (SAM), the Employee Compensation and Proprietor Income are represented as columns and rows. The columns reflect the allocation of each of these forms of income to each row, largely to Households. The rows reflect all sources of Employee Compensation and Proprietor Income. Because Labor Income is only earned from Industries, this value is only found in the Industry column of these rows.

HOUSEHOLD INCOME

Household Income can be calculated as the sum of all nine Household Income column totals from the Social Accounting Matrix. Each Household Income row shows all the sources of Household Income, which in large part will be from Labor Income.

DISPOSABLE HOUSEHOLD INCOME

Disposable Household Income can be calculated as Household Income as described above less the payments to Government rows within the Household Income columns.

HOUSEHOLD SPENDING

Household spending can be calculated as the sum of payments to the Commodity total row and Foreign and Domestic Trade rows within each Household Income column in Aggregate IxC SAM. These payments reflect household spending on goods and services sourced from within the Region (payments to Commodity row) and outside of the Region (payments to trade rows).

AVERAGE HOUSEHOLD INCOME

Average Household Income can be calculated as Total Household Income (for a given group) divided by Total Households (in the given group), found in the Households table under Area Demographics.

IMPLAN lists each Household Income Group by money income bracket. Therefore, the calculated average Household Income per household in a given group can be larger than the range listed for the group. The difference between income definitions would be the main explanation for mismatches where average Household Income does not fall within the specified range.

Also, IMPLAN's distribution mechanism for types of income by Household Income Group (based on the Consumer Expenditure Survey combined with Census household counts and BEA data on Personal Income) might create some misalignment as well, as we are not directly obtaining data on type of income by household group by Region.

AVERAGE HOUSEHOLD SAVINGS

The average savings rate for each Household Income group can be calculated from the Detailed IxC SAM. Savings for each group will be found as a payment to the Capital row. Divide the amount shown for each Household Income group column by the total for that Household Income group column to get an effective savings rate for each group. Typically, savings is only present at higher earning income levels.

INCOME IN ECONOMIC IMPACT ANALYSIS

There are three Event Types in IMPLAN that can be used to analyze changes in income separate from an Industry: Labor Income, Household Income, and Institutional Spending Patterns.

Labor Income Events are most appropriate to use when an analyst intends to model a change in labor payments isolated from an Industry’s production, such as an increase in wages. When creating a Labor Income Event in IMPLAN, analysts may specify whether the income is earned by Wage and Salary Employees (Employee Compensation), or by Proprietors (Proprietor Income), or some combination of the two. However, they cannot specify the specific household income categories which will receive that income. Labor Income includes all labor payments in the Region (local workers and in-commuters). If the user has specified Employee Compensation, IMPLAN will remove any income earned by non-resident workers based on the known EC commuting flows for that Region. After removing payroll taxes (Employee Compensation and Proprietor Income), the remaining portion is considered resident Household Income. IMPLAN will distribute the income to the nine Household Income Groups based on the known distribution within the Region.

Household Income Events are most appropriate to use when an analyst intends to model changes in household income that are independent of both production and payroll. In Household Income Events (unlike Labor Income Events), users can specify the specific income group(s) receiving the income into one of nine categories. Household Income Event Values should include all new household income of all residents in the Region. IMPLAN will remove any personal income taxes and savings (if applicable for the group), then distribute the remaining value to the list of Commodities purchased by the Household Income group and payments to other households for interest on borrowing.

Institutional Spending Pattern Events are most appropriate to use when an analyst intends to model change in Household Spending. The Institutional Spending Pattern Event allows users to specify a spending pattern for one of the nine Household Income groups. The entire spending pattern Event Value will be applied to the list of Commodities purchased based on the coefficients for that income group. This type of analysis will display results for the Industries in the Region Directly supported through household purchases.

ADJUSTMENTS FOR WAGE & SALARY INCOME OR DISPOSABLE INCOME VALUES

Employee Compensation in IMPLAN is the fully loaded cost of the employee to the employer. If only wage and salary income data is known, it must be first converted into a fully loaded Employee Compensation value before entering the value into the Labor Income Event. The wage and salary value is missing the employer’s cost of benefits and contribution to Social Insurance Tax. If the analyst used a wage and salary income value without converting, it would result in an underestimation of effects due to IMPLAN automatically removing payroll taxes and non-resident worker income from the wage and salary value.

Use the following resource to convert the wage and salary income to an Employee Compensation value as well as to convert an Employee Compensation value in the IMPLAN data or Results to a wage and salary income value.

If only disposable household income data is known, it must first be converted into a household income or household spending value. Both conversions will require data points from the Aggregate IxC SAM for the Region. For the Household Income, first sum the payments from the given Household Income Group column to all non-government rows (Federal Government Nondefense and State/Local Government Other Services). Next, divide that value from the Total Household Income for that given income group. This will provide a disposable income rate (percentage) for every dollar in Household Income. Lastly, divide the known disposable income value by the disposable income rate for the given income group. This will produce a value that can be entered in a Household Income Event.

To convert the disposable income value into a Household Spending value, first sum the payments to the Commodity, Foreign Trade, and Domestic Trade rows from the Household Income column within Aggregate IxC SAM for the Region. Next, divide that value from the total sum of payments from the given Household Income Group column to all non-government rows (Federal Government Nondefense and State/Local Government Other Services). This will provide a household spending rate. Lastly, multiply the disposable income value by the household spending rate. This will produce a value that can be entered in an Institutional Spending Pattern Event.

CONSIDERATIONS FOR ANALYSIS

Household Income Events are commonly and appropriately used for analyzing new income in a Region due to new residents that live in the Region but do not work there. Households and individuals may experience other economic shocks that increase or decrease the amount of income available to them. Before analyzing any impacts in IMPLAN it's important to both consider and state the underlying assumptions made in the analysis when reporting the results.

For example, if a policy change results in savings to households due to a reduction in cost on necessary goods and services such as electricity or insurance, how might these households react? If this household is living paycheck to paycheck, they may spend this newly available income on the items they typically buy. If so, a Household Income Event would be appropriate. If this household already has their expenses covered, maybe they go out to the movies more often, maybe they buy a few things on Amazon, or maybe they save it up for a future purchase like a new car. These considerations need to be explored further by the analyst prior to modeling impacts.