Prosperity Watch Issue 31, No. 1: Economic growth fails to generate increased incomes for NC families

Economic growth is supposed to create a “rising tide that lifts all boats” to greater prosperity for most people. Unfortunately, the opposite has been true in North Carolina over the last business cycle—although the state has seen positive economic growth, family incomes have actually fallen, suggesting that growth just isn’t enough to generate broadly shared prosperity in the modern economy.

For most of the 20th century, growth in Gross State Product—the value of all the goods and services produced in the state—resulted in corresponding growth in family incomes. Businesses produced more goods more efficiently, made higher profits, and in turn, passed some of those profits along to the state’s workers in the form of higher wages or increased job creation. And as workers pocketed those higher wages, they supported additional economic growth by spending their paychecks at local businesses, completing a virtuous cycle that translated the fruits of growth into shared prosperity.

As a recent report from the Budget and Tax Center makes clear, however, the ongoing transformation from a manufacturing-oriented economy to a service-based economy has completely upended the historic relationship between economic growth and rising incomes. As middle-wage manufacturing jobs have been replaced by low-wage service jobs across the state, incomes have steadily fallen, despite seeing long-term growth in the value of the goods and services produced in the state.

This trend has been especially pronounced over the last business cycle, when comparing the state’s economy in 2012—three years after the end of the Great Recession—to where it was in 2004, three years after the end of the 2001 recession. As the following graph makes clear, the value of Gross State Product per person has increased by almost 3 percent from 2004 to 2012, when accounting for inflation, while at the same time, Median Household Income has fallen by a staggering 15 percent over the same time period. This means that the average family has lost 15 cents for every dollar of income earned since 2004 at a time when the overall size and value of the state’s economy has improved.

In the face of these trends, policy makers face a profound challenge. By itself, economic growth does not automatically increase family incomes, nor can it provide ladders to the middle class for workers trapped in low-wage occupations. As a result, the state must re-orient its economic development efforts towards raising family incomes and ensuring broadly-shared prosperity. These efforts must involve creating quality jobs in growing industries that pay good wages and provide benefits. Without a course correction on the recent income trends, North Carolina’s families will continue to be shut out of receiving the benefits of economic growth.
 

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