Earnings Capacity: A better indicator of poverty than income.

Seeing as I just presented my thesis findings at the UPS Economics Poster Session, I thought it would be relevant to post about an aspect of my thesis that I found myself explaining to a few people over the course of the evening. My thesis was centered on ethnicity, and how a person’s ethnicity impacts their earnings capacity. This measure of wealth is different than the more widely used measures, like their income in relation to the rest of the nation. Earnings capacity is essentially the potential earnings an individual could make through their lifetime if they leverage their personal capital to its fullest.

This measure takes into account all of the characteristics of an individual that will allow them to generate income. Things like education, job experience, technical training, personal connections, natural skill/ability, all allow someone to generate income. Higher levels of these make for higher levels of potential earnings capacity, but not necessarily higher levels of current income.

Can you think of an example of someone with a high earnings capacity but low current income?

Do you have any friends who just graduated from this fine institution? Because they are perfect examples. Almost all college graduates are going to have very low incomes (sometimes negative) when just graduating college, but a high earnings capacities because their degrees set them ahead of a large portion of our country. Comparing earnings capacity to current income paints a much more complete picture of poverty than simply comparing income relative to the rest of the country. If the earnings capacity of an individual is much higher than their current income, you would generally expect their income to climb towards their earnings capacity because they have the capability to earn more than they are currently. On the other hand, if someones earning capacity and income are both low, then we would expect them to remain in poverty.

This measurement of poverty provides for a much more enlightening story about why someone is poor in terms of income. Potentially, it is because they are drowned in student loan payments, or maybe they have a preference for leisure over labor, or it could be because they actually have a low stock of human capital from which they can generate income.

Earnings capacity paints a different picture than other measurements of poverty in that it measures the wealth of personal capital that someone possesses rather than the money they are making currently. It allows you to measure who is actually equipped to make more income, and to measure whether you think they will be likely to generate more income in the future. I think it is a better measurement of socioeconomic standing than income, and I hope this brief explanation has demonstrated its use clearly.

I found this article about how earnings capacity can be used to assess level of damages in court cases where someone loses some ability to work. How does loss of future earnings capacity differ from loss of future earnings? This provides an example to address that question. An interesting read if you have interest in legal issues.

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