What's The Income of the Typical American?

What's the income of the typical American?

Such a simple question, yet the most commonly used number to answer this question gives a misleading impression of how people live -- the last census survey reports that median household income was $46,326 in 2005. [Note: The median is used because it represents the household that is exactly in the middle of the distribution; the arithmetic average would be higher because of the effect of the super-wealthy.]

It is important to get this right because of our political framing is based on this number. If people are living better than we think, then the message of struggle and insecurity is not likely to resonate. Worse, if people think that others are doing badly while they are not, they may hear calls for new policies as not helping them and likely to raise their taxes.

Statistics are used to answer a conceptual question and all too frequently people cite numbers willy-nilly. In this case, we are interested in standard of living, and we use income as the best available proxy. But there are many different ways to present income.

When most people think of standard of living, they are thinking of something that is persistent over time (researchers call this "permanent income").

If a wealthy businessman has a bad year with an unusual loss, few people would consider this person poor unless this was the beginning of his business going bankrupt. Similarly, many graduate students have very low incomes for several years. But few would classify this group as poor given their long term prospects (and probably back-up income help from their parents).

At the opposite end of the age spectrum, retired people have much fewer direct expenses, often have paid off their mortgage, have a home filled with furniture and appliances, and are not likely to have to subsidize their adult children. Consequently, a retiree's income of $40,000 translates into a very different standard of living than a young couple with a new born child. In several studies, retirees report being quite pleased with their situation even though their incomes are only slightly more than half of what they were in their fifties.

Finally, when most people try to align a dollar amount with a standard of living, they are probably envisioning a husband-wife couple with one or two children. In fact, there are lots of single person households that require much less income to reach the same standard of living. Most of the research on this issue was driven by the need to define a poverty threshold, which varies with household size.

Consequently, using data from the last census survey, one can make adjustments for the life cycle effects and household size and come out with a median income of over $60,000 for prime-age adults 25 to 62 years old. Your typical husband-wife couple in this age range has a median income of over $70,000; and couples in which both husband and wife work at least part of the year had a median income of $81,000.

Using a different data set that follows the same period over many years, it is possible to get even a better estimate of permanent income through prime-age and lessen the effect of income volatility. Because income swings up tend to be larger than income swings down, the median of multi-year income is higher than median in each of the separate years. Consequently, the median income over ten years ending in 2002 was nearly $75,000 (in 2005 dollars) for prime-age adults and only 20 percent had ten-year average incomes below $40,000.

In addition, half of adults had at least one year in which their total household incomes were greater than $100,000.

In replying to a Third Way publication that presented this analysis, Elizabeth Warren called the focus on prime-age a "third grade math trick" because the low incomes of young and old are considered special cases. Lou Dobbs uses the gimmicky number of median "personal" income being $35,000. This approach means that adults living together do not share resources and that all wives who stay home to take care of their children are in poverty.

I would argue that the approach used here is better at identifying the concept of typical standard of living. Further, a key rule in using statistics is that your findings should be consistent with other data points: 80 percent of people over 40 own their homes and the majority of the population lives in suburbs. These facts and the housing boom are not consistent with a "typical" income of $46,326.