Everything about The Median Household Income totally explained
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. The median income is considered by many
statisticians to be a better indicator than the
average household income as it isn't dramatically affected by unusually high or low values."
Household income isn't 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.
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).
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%
(External Link
), 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. Media coverage and statements by political figures can influence public opinion by linking the current state of the economy to the current government, when in reality it's probably caused by a problem in the private sector, such as the
dot-com bubble. Figure 1 shows how US incomes have changed since 1970. The periodic decreases were all caused by economic
recession. 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
(External Link).
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 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 don't have serious corruption problems and yet there's only a weak correlation (R=0.16) between the two indicators. Showing that even when comparing advanced countries, differences in economic activity don't have a predictable effect on household income.
Figure 2
Source: IMF GDP per capita(External Link)
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(External Link).
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 isn't 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.
Further Information
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