What Is Median Household Income? Median vs. Average Household Income in the US

Мedian household income provides a snapshot of the economic situation in a certain region. It helps estimate inequality and poverty levels, including our own financial status compared to other households in the area. Plus, it can inform the decision-making regarding the allocation of financial resources.

But how do we calculate it? How does it differ from the mean household income? What does each measure tell us about the economic standing of a given area?

Read on to find out the answers to these and other questions.

What Is Median Household Income?

Median household income is the midpoint dividing the people in a given area into two equal parts—below and above the middle amount.

There are a number of factors that can affect median household income, including inflation, job market conditions, and wage growth.

But here, we focus on what it tells us about a country’s or region's economic situation. We also discuss how it’s calculated and how it compares to other measures of household income.

So, let’s break down the concept further.

What Is Household Income?

According to the Census Bureau, household income is the total earnings of all people over the age of 15 living in the same household, whether they are related or not.

That said, the Census Bureau also reports family income. Like household income, it measures the joint earnings of people living under the same roof. However, they have to be related by birth, marriage, or adoption.

What Is Median Income?

The median is the middle value in a data set. It is calculated by counting all entry points in a and choosing the one in the middle.

It is different from the mean (often referred to as average). The mean is calculated by adding all entry points in a data set and dividing the sum by the number of items.

Okay, we know what the meaning of household income and median is. Let’s see how we can get the median household income.

How Is It Calculated?

You can calculate the median household income by finding the middle value.

Imagine you have a list of all household incomes in Massachusetts. You line them up from smallest to largest and find the one in the middle of the list. That is the median household income.

Let’s see another example.

You have an area with five households with the following incomes: $15,000, $20,000, $30,000, $50,000, and $100,000. In this case, the median would be—you guessed it—$30,000.

The median household income in the United States is calculated based on the same methodology. In 2020, it was $67,521.

Mean vs Median Household Income

Both measures can be used to compare and track changes in household income in different areas.

Although they measure the same general concept, the numbers can differ greatly.

But before we move on to explaining why that is, let’s discuss the definition of mean household income.

What Is Mean Income?

Mean household income is a statistic used to measure the average earnings in a given area. You can calculate it by adding up the incomes of all households in the area and dividing the sum by their number.

While it is a useful statistic, you should use it with caution. The figure can be skewed by very few high or low incomes in the data set.

However, in most areas in the US, the average household income is usually skewed upward due to income inequality.

Let us explain why.

Mean Household Income and Inequality

Income inequality is the unequal distribution of income among individuals or households within a given economy. It is measured by comparing the share of total wealth earned by the richest segment of society to the share earned by the poorest.

In the United States, the difference is striking.

According to a Congressional Budget Office report, the income of the highest quintile increased by 111% between 1979 and 2018. In comparison, this growth was only 40% in the lowest quintile. This huge inequality aggravated the wealth gap in the US.

So, how does that affect the mean and median household income in the US?

When income inequality is high, the mean household income will be higher too. This is because the difference in the wealth of rich and poor families is enormous.

So, the average is skewed upward by the large amounts, even if they’re far fewer than the small amounts.

Which Measure Is More Accurate?

What is better: using median household income or mean household income?

The median provides a more accurate representation of the real-life situation. It gives an idea of the true mid-point, taking into account the number of people in the investigated area and not the amount of money they make.

In contrast, the mean household income depends both on the number of households and the amount of money they earn.

While that could present a richer picture if we take into account the distribution of wealth, the number by itself can be misleading. It is more likely to be skewed by a small number of high-income households.

Therefore, most institutions report the median household income.

Wrap Up

So, what is median household income?

It is a measure of the average level of annual household income in a given area. It divides households with different incomes into two groups—below and above the midpoint.

All in all, it provides an accurate and unbiased representation of the average income in a society.

Unlike it, the mean can be skewed by income inequality, resulting in a misleadingly high number.