Median household income and per capita income are two popular metrics in looking at the standard of living in a given area. While they both can be used to compare the relative comfort of residents living in a particular location, they are calculated differently, and each has advantages and uses.
Per capita income is useful for looking at large groups like the population of a whole country, but it is easily skewed by households with incomes that are drastically high or low compared to the majority. On the other hand, median household income is useful for discovering the quality of life of residents in a given area as well as learning how many households are living in poverty.
TL;DR (Too Long; Didn't Read)
Per capita income is the average income of an area spread among all residents (including children), whereas median household income is the income below 50% and above 50% of all households in an area.
Median Household Income Meaning
When people talk about median income, they're usually talking about the median household income, meaning the income where half of all homes in a particular area earns more and the other half earns less.
This is different than an average or "mean" income because it doesn't allow for outliers to skew the numbers. An individual's household income is essentially that home's adjustable gross income, meaning the income they will be taxed on after applicable exemptions. This statistic is particularly useful when attempting to compare the typical standard of living in two or more cities, states or countries.
Median Household Income Example
To show the difference between the median and average household income, an example can be useful, so imagine a suburban street where the residents in the area earned $100,000, $125,000, $130,000, $150,000, $155,000, $175,000 and $850,000. The median income would be $150,000 because it is the income above half of the neighborhood's incomes and below the other half.
On the other hand, to calculate the average, you would first add all the numbers together to find the total yearly income of the neighborhood ($1,685,000) and then divide that number by the total number of households in the neighborhood (7), which would give you an average income of $240,714.
$150,000 is a better reflection of what most of the residents make than $240,714 because the single resident who earns a particularly high income has skewed the results to make the average income drastically higher than what every other resident makes. This is why it's important to look at the median household income when looking at an area's economic status because it can provide a more accurate look at the area's actual economic status.
What Is a Household?
Household income is the combined adjusted gross income of everyone over 15 who lives together in a household. It is worth noting that while median household income is a commonly used economic statistic, it is not the only measurement of an area's wealth. Two other commonly used measures of wealth are median family income and per capita income.
While many people assume that household and family income are the same, the two statistics are actually calculated differently. That's because a household income can include single people, whereas family income does not include the income of households that consist of single individuals.
Instead, family income only counts households that are occupied by two or more people related by birth, marriage or adoption. As a result, median household income is usually lower than median family income because many families have multiple wage earners (although not all families have multiple wage earners).
What Is Per Capita Income?
"Per capita" is a Latin phrase that means "by head", and it is commonly used in statistics rather than saying "per person". When someone talks about per capita income, they're talking about the average income per person in an area, which can also be used to evaluate the standard of living just like median household or family income. A nation's per capita income is calculated by dividing the entire country's income by the number of people living in the country.
Many people use the term "average income" when talking about the income of an average person in a given area. When used in this context, there is no difference between average income and per capita income. If someone talks about the "average income" of a household or family though, then it is not the same as per capita income. To better understand how per capita income compares to median household or median family income, imagine that a cul-de-sac is made up of:
- A family with two children and one wage earner who brings in $38,000
- A single man who lives on his own and earns $55,000 a year
- A divorced woman who earns $78,000
- A family made up of three children and two wage earners with a total household income of $89,000
- A family with two children, one of whom is 17 and works with his two parents, with the family business earning $90,000
The median (not average) household income would be $78,000, and the median (not average) family income would be $89,000. The total number of residents would be 15, and you could use this and the total neighborhood income ($350,000) to find the per capita income, which would be $23,333.
Calculating Wealth Statistics
These three statistics are the most commonly used measures of individual wealth in a country. While household and family income are similar in that they both consider households as a whole and use medians, per capita income not only includes all residents of an area (including infants and children who are far too young to work) but it also uses averages, which can allow for skewed results.
While the averages tend to skew per capita income to be higher than the median per capita income would be, because this data is divided by all residents — even those not in the workforce — rather than just households, it is generally lower than median household income or median family income.
United States Census Data
The United States Census Bureau includes income data in its census that is performed every 10 years. It also estimates this data every September by finding the total income for the previous year for all persons over 15 and then using this information to calculate median and mean data to estimate household, family and per capita income.
"Income" in these calculations includes all earned income (such as wages and self-employment income), interest income, estate and trust income, Social Security income, dividends and government assistance (including welfare, disability and survivor benefits). It does not include borrowed money, food stamps, gifts, capital gains, tax refunds or medical benefits.
According to the 2017 data, America's per capita income in 2017 was $31,177, the median household income was $*61,372* and the median family income was $76,135.
Why These Numbers Matter
Gross domestic product is the most often-used statistic when considering the wealth of a nation, but this number provides no insight on the wealth of individuals living in the country.
For example, two countries could have a GDP of $250 billion, but if one has a population of 500,000 and the other has a population of 100 million, then there will be many people living in poverty in the larger country, whereas people will have a much higher standard of living in the smaller country. When you consider the GDP per capita, you'll see that the per capita income of the first country is $50,000, whereas the second is only $2,500.
Similarly, if you see that a country's GDP grew by 2% in a year, that might sound good but not if the population also grew by 4%. In fact, there have been cases where a country's GDP has grown while the GDP per capita actually shrank. This happened to Afghanistan in 2017, when the economy grew by 2.2% but the per capita GDP fell by .5%.
Per Capita or Household Income?
When weighing the benefits of per capita vs. household income, it's worth realizing that each of these statistics has its own uses and advantages. Per capita income is generally used to look at large numbers of people, particularly the population of one country vs. another. In fact, many experts argue that the per capita income of a country is a more effective metric than GDP since it can provide insight on the standard of living for a population. On the downside, while per capita income is easier to calculate than median income metrics, it fails to explore income disparity, poverty or wealth.
Median household income calculations are very useful in determining the economic health of a given area since they help eliminate outlying incomes on either side. This data can be used to compare the quality of life among different groups of people, or it can be used along with other data such as real estate prices to determine the affordability of housing and the typical amount of disposable income people may have in a given area.
For example, housing experts say that home buyers can generally afford to pay up to three times their average income and that when the median home price rises drastically higher than three times the median household income, the market will likely crash soon. In the housing bubble of the 2000s, median home prices in many areas, including Southern California and Miami, were as much as five times higher than the median household income in the vicinity.
In general, the GDP per capita should grow at a similar rate as the median household income. When per capita income grows drastically faster than median household income, it is an indicator that the wealth is largely flowing to a small segment of the population, and there is a large amount of income disparity. In fact, the divergence between these two statistics in the U.S. has led to many discussions about replacing GDP per capita with median household income as a more standard comparison of the wealth of residents in a given country.
Using Median Family Income
Median family income is not used as often as median household income, but there are still some applications where it is preferable.
For example, when looking at whether local home prices are out of reach for the typical family, it is preferable to use the median family income because the majority of detached homes are purchased by families, as single people often move into apartments or condos. As the median family income tends to be higher than the median household income, this gives you a better idea of the true affordability of houses since many families have more than one income.
This is also why the U.S. Department of Housing and Urban Development uses median family income to determine standards for its Section 8 Housing Choice Voucher program, although it's worth noting that this program is also affected by family size and other factors.
- Investopedia: Household Income
- Investopedia: Per Capita Income
- Investopedia: Per Capita
- Institute for New Economic Thinking: GDP Per Capita Versus Median Household Income: What Gives Rise to Divergence Over Time?
- FRED Economic Research: Median Family Income in the United States
- Department of Housing and Urban Development: Estimated Median Family Incomes for Fiscal Year (FY) 2019