Going to work and collecting paychecks isn’t the only way to make money in America.
“Since 1980, direct labor income has become a smaller share of personal income, while income from transfers has risen,” write Wells Fargo economists John Silvia and Sarah Watt House. “This mix may help to stabilize consumption but also reflects altered incentives to work.”
Wages and salary continue to be primary source of income, but have fallen from 59 percent of personal income in 1980 to just 51 percent today.
Silvia and House identify three reasons why this is happening:
- Aging baby boomers and longer life expectancy: “[A] growing share of the population is drawing social security and Medicare, which is reflected in the rising share of income derived from transfers. In addition, with a larger population of retirees, more Americans are likely cashing in on retirement savings and obtaining income on assets, although the low interest rate environment since the financial crisis has diminished the return on those assets.”
- Increased eligibility and use of social insurance programs: Also called transfer payments, these programs include disability insurance and food stamps. “Although having fallen from a recent peak of 19+ percent in the aftermath of the Great Recession, the share of income derived from transfers has steadily risen over the past two decades.”
- Rising rental income: “[R]ental income has risen noticeably since 2000, as more households look to allocate capital to rental property to supplement labor income.”
Silvia and House note that unfavorable labor market dynamics are also a factor.
“We suspect this is a product of both demand and supply forces,” they write. “On the demand side, firms have been cautious to hire given the modest and uncertain gains in final demand. In addition, as global markets continue to expand, firms are increasing their hiring abroad to serve markets there. On the supply side, the availability of transfer payments and mandated benefits have increased the reservation wage for many workers and lowered the cost of additional leisure. Moreover, an excess supply of labor relative to demand has kept wage growth muted. restraining labor income even as hiring has improved.”
Whatever the reasons, it’s very clear that labor is playing a smaller role in the average personal income statement.