What is the Median Household Income? How to Calculate Median Household Income?

What is the Median Household Income?

The median household income in the United States, as reported by the most recent U.S. Census Bureau Current Population Survey data for the year 2021, stands at $70,784. However, it's important to note that this figure can vary significantly depending on the geographical location. In different cities across the nation, median household income exhibits a wide range, spanning from under $40,000 in certain areas to exceeding $150,000 in others.

Over a longer time span, data from the U.S. Census Bureau indicates that the median household income in the U.S., when adjusted for inflation, experienced a substantial growth of nearly 27% between the years 1984 and 2021.

This growth signifies an overall improvement in income levels for households across the country. Conversely, in a more recent timeframe, from 2019 to 2021, the median household income underwent a decline of 2.8% from its peak value of $72,808. This decline points to a short-term economic shift that impacted household income during this period.

Median Household Incomes by State

Here is the list of Median Household Incomes by State: 

Average US Household Income

Average US household income, a pivotal economic measure, represents the total earnings of households across the nation. It's derived by adding up all household incomes and dividing by the total number of households. This gauge provides critical insights into economic health, living standards, and income distribution.

As of the most recent data, the average household income in the United States was approximately $68,700 per year. This metric holds significant implications for policymakers, economists and researchers, revealing purchasing power, savings potential, and investment capacity.

However, outliers, like ultra-high-income households, can skew the average, distorting the true income landscape. To address this, economists often turn to the median household income, which stands at around $67,500 annually. The median offers a more realistic income portrayal by representing the midpoint of incomes, minimizing the impact of extremes.

Average household income dynamically shifts due to economic growth, inflation, and other factors. Over time, it has trended upwards, reflecting improving living standards. But it's imperative to consider other metrics like income distribution and poverty rates. For instance, in 2020, the official poverty rate rose to 11.4%, indicating financial challenges for a significant portion of the population.

Ultimately, average US household income is a window into national economic health, offering a snapshot of prosperity, inequality, and the economic circumstances of American households.

How to Calculate Median Household Income?

The calculation of median and average household incomes considers varying household ranges. The median, positioned at the middle of a dataset, might differ from the average. For instance, within a household, incomes of $35,000, $40,000, and $45,000 result in a median of $40,000. This metric is robust against extreme values and provides a representative middle point.

In contrast, the average, or mean, income involves summing all incomes and dividing by the total number. In the given scenario, the average income would be $40,000 + $35,000 + $45,000 / 3 = $40,000.

However, this can be skewed by outliers. These measures serve distinct purposes: the median offers a central value that mitigates extreme values' influence, while the average considers the total sum, providing insight into the overall income distribution. Thus, understanding both metrics is vital to comprehending income trends accurately.

What is the Difference Between Average and Median Income?

The primary distinction between average income and median income lies in their calculation methods. Average income, also known as mean income, is determined by adding up all individual incomes and then dividing the sum by the total count of incomes within the dataset.

In contrast, median income corresponds to the income value situated in the middle of the dataset when arranged in ascending or descending order. This involves sorting all income values and identifying the income figure positioned precisely at the midpoint.

This differentiation yields a significant outcome: average income is vulnerable to distortion by extreme high or low income values. To illustrate, consider a scenario where five individuals earn incomes between $40,000 and $50,000, while one person earns $500,000. In this scenario, the calculated average income would be skewed upwards to approximately $120,000 due to the substantial influence of the exceptionally high income.

Conversely, the median income remains impervious to extreme values. In the aforementioned scenario, the median income would still fall within the $40,000-$50,000 range, as it is determined by the income value positioned at the center of the dataset. This characteristic of median income renders it a more robust measure, unaffected by outliers, and provides a balanced depiction of income distribution.

Why Was Median Household Income Down?

This marked the initial instance of a decline in median U.S. income since the aftermath of the Great Recession, which left millions of Americans unemployed. Experts attribute this trend primarily to the onset of the global COVID-19 pandemic in early 2020. The implementation of lockdowns, business closures, reduced travel, and widespread layoffs all played a significant role in this decline.

To counteract the severe economic impact, the U.S. government introduced a series of stimulus measures, including the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSA Act). These interventions helped mitigate the extent to which household income dropped.

Furthermore, there are indications that the reduction in income disproportionately affected individuals with lower wages. Notably, the poverty rate escalated to 11.4%, registering a 1.0 percentage point increase from 2019's 10.5%. This shift marked the first instance of a rise in poverty following five consecutive years of decline.

What is Household Income?

Household income, in essence, pertains to the total gross earnings of all individuals within a household who surpass a designated age threshold. This encompassing concept encompasses all family members residing under the same roof, encompassing spouses and their dependents, regardless of whether their incomes directly contribute to household upkeep.

Notably, household income encompasses the earnings of all occupants of the household, even if they lack familial relations. This financial metric holds significance as a pivotal risk assessment tool for loan underwriting by financial institutions. Moreover, it serves as a valuable economic gauge reflecting the quality of life within a specific region.

Essentially, household income encapsulates the collective gross cash earnings of all household members. The Census Bureau defines a household as a collective of individuals cohabiting under the same dwelling, irrespective of their familial connections. This comprehensive metric aids in evaluating the economic vitality of a locality and facilitates comparisons of living conditions across diverse geographic areas.

It's important to acknowledge that the exact delineation of household income might exhibit variances contingent on distinct research endeavors and governmental agencies or programs. Within the spectrum of wealth evaluation, household income constitutes one of three fundamental categories, complemented by family income and per capita income.

What Are Some Example of Household Income?

Consider a hypothetical scenario to illustrate household income dynamics. Mini, a finance professional, garners a yearly income of $120,000. His partner, Jaan, contributes $80,000 in earnings working as an analyst. Consequently, their combined family income sums up to $200,000 annually. Adding a layer of complexity, their household includes Mini's nephew, Jim, who pulls in $40,000 from his job.

If exclusively account for these stated figures, the household's total income, as per the parameters defined by the Census Bureau, reaches $240,000. This scenario underscores how household income involves amalgamating the earnings of all individuals residing together. In this instance, Mini, Jaan, and Jim's earnings collectively shape the economic framework of the entire household, showcasing the multifaceted nature of determining total household income.

What Were the Key Factors Contributing to the Decline in Median Income?

The decline in median household income can be attributed to a range of significant factors. Firstly, Esri's discrete estimation methods play a crucial role. Household incomes are categorized into finite groups, and changes in the distribution across these groups can lead to apparent shifts in median and average income. However, underlying shifts in individual household income might be relatively minor.

Additionally, socio-demographic trends exert a considerable influence. Changes in income patterns within broader socio-demographic groups, coupled with geographic and demographic shifts, impact small area estimates. For instance, a transitioning population, such as an aging demographic with fixed Social Security incomes, can result in declining median incomes. The influx of younger, lower-income families due to population diversification further complicates the landscape.

Esri's five-year forecasts consider historical income growth during various economic cycles and incorporate inflation rates. Given the historically low growth environment, some areas may experience anticipated median income declines. It's essential to consider both median and average incomes when analyzing an area's economic landscape. While median income reflects the middle value and is less affected by outliers, the average encompasses the entire distribution, offering more comprehensive insights but being sensitive to extreme values.

In conclusion, the decline in median income results from the interplay of discrete estimation methods, socio-demographic trends, changing population dynamics, economic cycles, and inflation rates. Understanding the complexity of these factors provides a more holistic view of the challenges impacting median household income.