By Bryan Bezold
RCGA Director of Research and Chief Economist
Most of us tend to think of income as primarily derived from
labor, but income can be earned from other sources as well.
Nationwide, roughly 78 percent of total personal income is earned
from labor. The remainder is from either transfer payments or
is received in the form of dividends, interest and rent. Transfer
payments are governmental payments such as Social Security and
other social benefits. As the name implies, dividend, interest,
and rent income is received in dividend payment from stock ownership,
interest payments, or rent derived from structures. More simply,
it’s the return on individuals’ capital—wealth at work.
The St. Louis metropolitan area derives a higher share of its
total personal income from dividends, interest, or rent (henceforth,
D.I.R.) than the U.S. average, the “St. Louis Wealth Factor.”
Nationwide, D.I.R. income represents approximately 15.6 percent
of total personal income, or $5,366 per person. In St. Louis,
D.I.R. income makes up 17.9 percent of total personal income,
which amounts to an average of $6,361 per person. That’s almost
$1,000 more than the U.S. average.
St. Louis also has a higher share of income from D.I.R. than
most other major Midwestern metropolitan areas. On a per capita
basis, only Milwaukee is higher, by $938 per year.
Why is it the case that St. Louis earns a higher share of income
from capital than other Midwestern regions? Part of the answer
has to do with age. In 1985 an economist named Franco Modigliani
won a Nobel Prize for an idea he had called the “Life Cycle
Hypothesis.” According to Modigliani’s hypothesis, individuals
will accumulate assets until they retire, and then draw down
that stock of capital after they retire. All other things being
equal, the closer an individual is to retirement, the more assets
they will own. As they own more assets, they are more likely
to receive income, in the form of dividends, interest, or rent
on those assets. So all other things being equal, we would expect
that an older region would have a higher share of income from
D.I.R. Looking at the table on the below, we can see that the
median age in St. Louis is 37.3, higher than the U.S. average
and most of the other metro areas in the Midwest.
Although the Modigliani’s life cycle hypothesis is probably
a partial explanation of St. Louis’ higher share of income from
D.I.R., it doesn’t explain all of the difference. Both Cleveland
and Pittsburgh have higher median ages than St. Louis, but lower
shares of income from D.I.R. The rest of the difference is due
to other factors.
In this case, those other factors probably include St. Louis’
legacy as one of the major cities in America. For decades St.
Louis has been a center of entrepreneurial and corporate activity.
The large companies that have started, grew, and evolved here
produced generations of St. Louisans with ownership stakes in
companies such as Monsanto, McDonnell (now Boeing), Ralston
Purina (now Nestle), and Anheuser-Busch.
The higher share of income from D.I.R. is good for the St. Louis
region for several reasons. First of all, that extra income
supports some consumption expenditures in the St. Louis region.
Those consumption expenditures in turn support jobs and income
for other St. Louisans. The second is that the high share of
D.I.R. income is no doubt a source of philanthropy that the
region is famous for, such as the United Way of Greater St.
Louis consistently receiving more in donations than its counterparts
in some other, larger, metropolitan areas. And third, it is
important because the capital that generates this income, is
capital that’s also available to invest locally. The Arch Angel
network, an RCGA backed initiative to provide entrepreneurs
with access to early stage capital, no doubt benefited and continues
to benefit from the availability of this type of capital in
the St. Louis region. Over the last two years, the Arch Angel
network has invested more than $7 million in St. Louis area
start-up companies.
(click here to view full
chart)
