Among economic standards, average household income is among the most often cited in popular media, likely due to its generally familiarity in the lives of working class Americans. Of course, this often means that average citizens believe that they have a fully understanding of the context and implications of average household income in relations to the American economy. But indeed, this economic metric is more complex than it first appears.
For example, average household income in the United States is calculated through a specialized process rather than a straightforward equation. Moreover, average household income doesn’t always take into account extenuating factors that can cause the “real” median value to fluctuate. At the same time, average household income in a given year isn’t an island and should be understood to be a part of several larger trends.
As it stands, you don’t need a doctorate in economics to understand average household income. Instead, you can read this handy primer on average household income in the United States to learn more about this touchstone economic metric. With this knowledge in mind, you’ll be able to better contextualize one aspect of America’s economy at large, especially as it relates to individual families and their income going forward.
Average Household Income in the United States as of 2020
Currently, the most reliable average household income figures available from the US Census Bureau are from 2017, as gathered in the short-form census. In 2018, the US Census Bureau reported that 2017’s “real” average household income stood at $61,372. This figure represented a 1.8% increase from 2016, when it stood at $60,309. This was the second consecutive year this figure increased nationwide.
While this represents a net increase according to the median statistical model, 2017’s average household income represented another step in several ongoing trends, including a shrinking middle class resulting from growing income inequality (more details below in “Current Trends”).
How Average Household Income is Calculated
Average household income can be measured using a variety of methods, often depending on the organization or institution who initiates the calculation. However, the US Census Bureau’s methodology is among the most widely accepted, especially given its use within the US government to adjust existing financial policy.
In order to find the sum total household income, the US Census Bureau has (since 2009) added together the full value of the following values for all household members 15 years or older:
- Wages, salary, commissions, bonuses and tips from all jobs before deductions for taxes
- Self-employment net income after business expenses
- Interest received from checking and savings accounts, money market funds, individual retirement accounts (IRAs), retirement plans, and government bonds
- Dividends received, credited, or reinvested from stocks
- Profit or losses from rental of land, buildings or real estate
- Monetary Social Security benefits
- Financial gains from public assistance or public welfare payments such as SSI
- Retirement, survivor, or disability pensions from companies, unions, and government employers
- Miscellaneous income from (but not limited to) Veterans Administration (VA) payments, unemployment compensation, child support, alimony and assistance from private charities
All household members evaluated using this method need not be related to the on-record head of household in order for their income and miscellaneous financial factors to be considered part of the “household” at large. Along the same lines, the resulting average household income figure is not disseminated based upon household size, making it more challenging to compare any two average household income figures without additional context.
Overall, this calculation technique is designed to take into account only income related directly to monetary gain or loss. This calculation does not take into account household debt or non-monetary assets. As such, average household income figures gathered through this methodology should generally be used only for evaluating base economic standing (especially as it relates to employment).
Understanding “Real” Household Income
As alluded to above, the standard calculation used to determine average household income does not take into account a variety of contextual factors that may cause a household’s income to fluctuate in relative terms. One such factor is inflation, which has a noteworthy impact on the actual “value” of a household’s income in terms of so-called “buying power.”
To make up for these shortcomings, some authorities also calculate “real” average household income figures using inflation-adjusted inputs. This can help compare average household income figures from disparate time periods. This is especially the case when it comes to evaluating peak and base household incomes during times of economic depression, such as the recent 2008 recession.
Of note, “real” average household income is often used to compare rates of poverty in the United States. Because “extreme poverty” is applied to any household living on fewer than $2 a day, all calculations related to average household income must be resistant the effects of inflation (which can cause dollar amounts to increase while simultaneously decreasing each dollar’s actual value).
Understanding the Difference Between Median and Mean Household Income
In all, there are a wide set of statistical models which may be used to illustrate household incomes across the United States. “Average household income” as it is commonly discussed uses a median statistical model, which pinpoints the single American household income value at the dead center of all other American household income values. This evenly splits all American household incomes into two even halves, with an equal number of households above and below that line.
However, due to misunderstandings in terminology, some folks without context believe “average household income” to use a mean statistical model. This type of model would add up all household incomes across the country and divide that sum by the total number of American households. The resulting figure would represent a numerical average which may or may not reflect a significant midpoint in the household income range.
The distinction between a median and mean statistical model is crucial to providing an average household income figure that most accurately reflects the financial status of American families at a specific point in time. Mean statistical models, in particular, are susceptible to high-end household income figures, often causing a mean household income total to appear much higher than the true household income of a middle class household.
Per-Dollar Average Increasing
Generally, speaking, the per-dollar average for household incomes in the United States in 2017 continued on an upward trend that began in the midst of the late 2000’s economic recession. At that time, in 2010, average household income hit a recent low at $49,276. This was down significantly from the previous high water mark in 2007, when this figure stood at $50,233.
However, since that low point in 2010, the US average household income has continued to grow at a steady rate (save for a brief over-performance and correction sequence in 2013-2014). As of 2017, average household income stands at $61,372, an all-time high water mark according to US Census Bureau records dating back to the 1980s.
In broad terms, this trend indicates that more wealth has been generated and distributed across the US population since the most recent economic downturn. Many prognosticators have taken this continued growth as a sign of stability in the US economy overall, especially when it comes to serving the financial needs of working class households.
Income Inequality Increasing
Even though current average household income statistics show an upward trend in per-dollar averages, there are deeper trends played out by examining the precise distribution of wealth during this nearly 10 year period of growth. Specifically, all signs currently point to a stark increase of income inequality across the American socioeconomic spectrum. To put it frankly: the rich are growing richer, the poor are growing poorer, and the middle class is rapidly shrinking.
Current statistical analysis of households reporting income at specific class-based levels bear this reality out. Currently, most statistical models place households making between $25,000 and $100,000 per year within the middle class, with the upper and lower classes falling above and below this bracket, respectively.
As far back as 1967 (according to Census data), some 65.2% of US households fell into the middle class bracket while 9.1% and 25.8% fell into the upper and lower classes, respectively. Fast forward to the year 2000, when the upper-middle-lower class splits warped to 26.5%-53.8%-19.6%. The massive increase in upper class households (and resulting shrinkage in the middle class) is apparent. The percentage of lower class households did shrink during this time, though this may be related to shifting definitions of poverty following welfare reforms in the 1990s.
Even though upper class percentages shrank during the late 2000’s recession, they have rebounded and hit new high water marks in 2017, where they stand at a whopping 29.2%. Meanwhile, the middle class has shrank to an all-time low at around 50.5% of US populations. While these statistical breakdowns don’t address precise dollar amounts, many attribute these shifts to further growth at both extreme ends of the income spectrum.
Currently, more social and political authorities are starting to sound the alarm on this growing trend in income inequality. If it is allowed to continue without reprieve, the US faces the prospect of losing its all-important middle class, further depending inequalities in other aspects of American life.
Wages Remain Below Peak
As a further extension of current trends relating to income inequality, current analysis indicates that a considerable contributing factor may relate to average wages among American workers. Specifically, current statistical models show that US wage rates have been unresponsive to massive growth in US gross domestic product (GDP) over the past several decades. This primarily impact middle class households, as they rely on these wages to maintain their lifestyle.
This can clearly be seen in data from the US Federal Reserve’s Economic Data system. According to their records, US wages and US GDP last held parity in 1995. US wage rates hit their most recent peak in 1999 before trending downwards towards 2004 (when another mutli-year uptick occurred). All the while, US GDP continued to grow until it began its downward trend in 2007 (on the front end of the upcoming recession).
US GDP then dropped dramatically until 2009, with US wages falling during this period as well. Since 2009, though, US GDP has grown at an even rate each and every succeeding year. Despite this, US wages have only seen rate increases in 2013 and 2015 – both of which have left rates far lower than their 1999 peak. In short, US workers who rely on these wages have not been given their fair share of recent economic growth.
Precise solutions for this problem are difficult to come by, especially when accounting for disparate industries with market-specific pay wage rates. Some states have made efforts to raise their minimum wage in order to offset this ongoing disparity, with further efforts to this extend ongoing at the federal level. How this will affect US GDP, in turn, is yet to be seen.
Gendered Inequality Continues
As a further subset of the previously described household income inequality, gender-based income disparities continue to make it more challenging for female-headed households to hold parity with male-headed households. This is an especially pressing matter going forward as more women attain higher levels of educational attainment and seek higher paying careers while heading their family.
US Census Bureau data currently bares this data out up to the present day. With a bachelor’s degree, men in the US are expected to make $50,916 on average, while women with the same educational credentials are making $31,309 on average. This disparity continues through higher levels of education and is apparent in nearly all professions.
While this disparity is, in its own right, troubling, it may also indicate an oncoming economic disparity for families headed by men and women, respectively. Based on these averages, families headed by women would be expected to make less overall compared to their male counterparts. Some state-level remedies for this problem have been proposed and adopted, including requiring equal pay rates across all employees (regardless of gender).
Overall, there’s a lot to learn about the US’ average household income, from the methods used to calculate to the many implications it holds for the US economy. When used responsibly and with proper context for larger trends, average household income figures can be used, in part, to help predict the economic futures of households across America.