Median household income

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The median household income is commonly used to provide data about geographic areas and divides households into two equal segments with the first half of households earning less than the median household income and the other half earning more.[1] The median income is considered by many statisticians to be a better indicator than the average household income as it is not dramatically affected by unusually high or low values."[2]

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Median income is the amount which divides the income distribution into two equal groups, half having income above that amount, and half having income below that amount. Mean income (average) is the amount obtained by dividing the total aggregate income of a group by the number of units in that group. The means and medians for households and families are based on all households and families. Means and medians for people are based on people 15 years old and over with income.
-US Census Bureau, Frequently Asked Question, published by First Gov."[1]

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Household income is not to be confused with family or personal income. Household income is often the combination of two income earners pooling the resources and should therefore not be confused with an individual's earnings. Even though the term family income may sometimes be used as a synonym for household income, the US Census Bureau defines the two differently. While household income takes all households into account, family income only takes households with two or more persons related through blood, marriage or adoption into account.

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[edit] International statistics

Median household income for selected countries is shown in the table below. The data for each country has been converted to US dollars using purchasing power parity (PPP) (obtained from the Organisation for Economic Co-operation and Development).[3] Note that PPP-adjusted household income is not reflective of relative buying power (or prosperity) between countries because different governments subsidize different services (see Common Misunderstandings section).

Country Median household income national currency units Year PPP rate (OECD) Median household income (PPP)
Switzerland[4] 95,184 CHF 2005 1.74 $55,000
California, US[5] US State $54,000
United States $48,000 USD 2006 1.00 $48,000
Canada [6] $53,634 CAD 2005 1.21 $44,000
New Zealand [7] $62,556 NZD 2007 1.54 $41,000
United Kingdom [8] £24,700 GBP 2004 0.632 $39,000
Australia[9] $53,404 AUD 2006 1.41 $38,000
Israel[10] ₪107,820 ILS 2006 2.90 $37,000
Ireland €35,410 EUR 2005 1.02 $35,000
Scotland,
United Kingdom[11]		 £21,892 GBP 2005 0.649 $34,000
West Virginia, US[12] US state $33,000
Hong Kong[13] $186,000 HKD 2005 5.96 $31,000
Singapore[14] $45,960 SGD 2005 1.55 $30,000

[edit] Median household income and the economy

Achieving real gains in household income can be very difficult. Since 1980, US gross domestic product (GDP) per capita has increased 67%[1], while median household income has only increased by 15%. An economic recession will normally cause household incomes to decrease, often by as much as 10% (Figure 1).

Median household income is a politically sensitive indicator. Voters' can be critical of their government if they perceive that their cost of living is rising faster than their income. Figure 1 shows how US incomes have changed since 1970. The last recession was the early 2000s recession and was started with the bursting of the dot-com bubble. It affected most advanced economies including the European Union, Japan and the United States.

Many economists are concerned that another recession may be imminent. The current crisis began with the bursting of the US housing bubble, which caused a problem in the dangerously exposed subprime mortgage market. This in turn has triggered a global financial crisis. American household incomes have only recently recovered from the early 2000s recession (see Figure 1). The threat of another recession has caused confidence to plunge to record lows, with polls showing that 81% of Americans believe that the United States is heading in the wrong direction [2].



The relationship between economic activity and household income varies substantially from country-to-country. Consider the situation of Equatorial Guinea, a small African oil state with one of the world's highest GDP per capita (US$50,200). Equatorial Guinea's GDP per capita is 50% higher than Australia's, yet life expectancy in Equatorial Guinea is less than 50 years and most of their citizen's live in abject poverty, the vast majority subsisting on less than $1 per day.

Equatorial Guinea Australia Iraq (war torn)
GDP per capita (PPP) $50,200 $33,300 $1,900
Biggest export Oil Coal Oil
Life expectancy 49.5 80.6 69.3
Infant mortality 87 5 47

Equatorial Guinea is corrupt country, which helps explain why the normal people are not benefiting from the oil wealth. However this issue isn't just about corruption. A comparison between median household income and GDP per capita for advanced countries is shown in Figure 2. These countries do not have serious corruption problems and yet there is only a weak correlation (R=0.16) between the two indicators. Showing that even when comparing advanced countries, differences in economic activity do not have a predictable effect on household income.

Figure 2

Image:International Median Household Income.png

Source: IMF GDP per capita[3]

[edit] Common misunderstandings

There is a common misunderstanding that GDP per capita can be used to predict median household income. For example, Ireland and the United States have a similar GDP per capita, from this people sometimes assume that their household incomes are also similar, when in reality US incomes are much higher when adjustments for purchasing power parity are made. The main reason for the disparity is that household consumption only makes up about 43% of Ireland's GDP, whereas household consumption makes up about 67% of America's GDP[4].

It is also erroneous to use PPP-adjusted household income as the sole metric to compare actual household relative prosperity/buying power across countries. That's because different governments subsidize different services. So, for example, in the US, many individuals are responsible for paying their own medical costs (or premiums) whereas the UK, Canada and other countries provide national health care for free. Some countries also subsidize education differently. So the effective buying power, even of $1 of PPP-adjusted income, is very different. As an example, if both a US household and a Canadian household make $10,000 in PPP-adjusted household income, the median Canadian household is actually better off based on median spending on healthcare in the US (which is absent in Canada since national health care is provided to all citizens for free).

Another misunderstanding is the idea that if the economy is growing (GDP growth) then household incomes are also growing. In reality economic growth doesn't necessarily equate to growth in median household income. For example the US economy grew 8% over the 2000-2006 period but median household income actually fell 2%.

A strong economy with a high GDP per capita is a key requirement to deliver prosperity to the people, but it is not the only requirement. So in a sense GDP per capita is an indirect indicator of prosperity, whereas median household income is a more direct measurement, albeit still inaccurate because of differences in government subsidies of essential services such as health care and education.

[edit] See also

v • d • e
Demographics of the United States
Demographic history
Economic and social
Religion
Race,
ethnicity and
ancestry

[edit] References

  1. ^ a b US Government, the different between =2006-06-29.
  2. ^ US Census Bureau on the nature the median in determining wealth. Retrieved on 2006-06-29.
  3. ^ OECD, PPP conversion rates. Retrieved on 2006-01-20.
  4. ^ Swiss Government, income quintiles, 2005. Retrieved on 2007-01-19.
  5. ^ California Median Household income, 2006. Retrieved on 2007-03-22.
  6. ^ Canada median household income. Retrieved on 2008-5-2.
  7. ^ New Zealand income survey showing median household income. Retrieved on 2007-10-04.
  8. ^ UK parliament discussion showing median household income. Retrieved on 2006-12-31.
  9. ^ Census QuickStats. Retrieved on 2007-10-07.
  10. ^ israeli median household income, 2006. Retrieved on 2008-01-15.
  11. ^ Scottish Economic Statistics 2007. Retrieved on 2007-10-09.
  12. ^ West Virginia, Median Household Income, 2005. Retrieved on 2007-03-22.
  13. ^ Hong Kong median household income, 2005. Retrieved on 2007-01-19.
  14. ^ Singapore median household income, 2005. Retrieved on 2007-01-19.

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