What is Household Income?

Household income is like a barrel of water…

Everyone in the home goes to the well to collect water in their buckets. When they get home they empty their buckets of water into one larger barrel. Each individual’s earnings is like the bucket they use to get water from the well. The barrel of water is like the household income because it holds all of the water the entire household can collectively carry.

Household income measures the total earnings of every member of a household, whether those people are a family or separate individuals who live together. Specifically, it includes all income earned by people aged 15 and older but excludes the earnings of those under 15.

Household income is a popular measure among economists and scholars because it can show important trends.

For example, changes in household income can reveal whether the financial situation of the average household is improving or getting worse. Differences in the rate of change in household income can also highlight inconsistencies in results for various types of households, such as families versus unmarried couples versus a group of unrelated renters.

Comparing changes in household income to the rate of inflation (the increase in the price of goods and services over time) is also a popular way to see whether people’s spending power is rising or falling.

The difference between household income and family income lies in the definition of a family and the definition of a household.

A family is a group of two or more people, related in some way either by blood, adoption, or marriage, who live in the same household.

A household includes everyone who lives in a single home. It could be one person, or two or more people, regardless of their relation to each other.

Average household income is typically lower than family income. Many households include just a single person while families, by definition, include at least two people. This gives families the potential for additional earning-power compared to a one-person household.

On average, families also tend to have a higher proportion of people at prime earning age. Many households include the young or the elderly, who don’t work full-time, rely on Social Security benefits, or who have lower earning potential than those in the middle of their career.

Per capita income is the average amount of income earned by every person included in the calculation. Often, people calculate the per capita income for a city, town, county, state, or the whole country.

For example, let’s assume a town has 100 residents and the gross income of everyone who works in the town is $1M. The town’s per capita income is:

$1M/ 100 people = $10,000

But, what if many of the residents are homemakers, retirees, or children who don’t work?

The calculation of per capita income still includes them because it calculates the average income per person. Also, if a child under the age of 15 worked, his or her income is included in the calculation, even though household income excludes it.

Household income doesn’t calculate an average. Instead, it finds the sum of the earnings of everyone 15 or older in a single home.

To calculate household income, add the total income of everyone aged 15 or older who lives in a single household. Do not include the earnings of anyone who doesn’t live in the household or anyone under the age of 15.

For a household including two adults, John and Jane, the formula is:

John’s income + Jane’s income = Household income

If John and Jane have a 13-year-old child who earns some money babysitting, that child’s income is not included in household income because she is under 15.

Once their child turns 15, any income she earns becomes part of the calculation, making the formula:

John’s income + Jane’s income + Child’s income = Household income

You can calculate household income for any period. To find monthly household income, add all the money each person earns in a month. To find annual household income, add everything they earn in a year.

The US Census Bureau and Bureau of Labor Statistics (BLS) collect, track, and publish household income numbers to help economists discover trends and changes in income distributions.

In addition to tracking data for households across the country, they offer breakdowns based on demographics like region, ethnicity, and gender.

For example, you could use BLS statistics to find the average household income in Maryland or the average household income for homes headed by an Asian woman or a Hispanic man. This can be useful for people researching income inequality based on gender, race, or region.

In 2018, the annual household income quintiles were:

The top 5% of households in the United States earn more than $248,728 per year.

The median household income in the US in 2018 was $63,179.

A median is a measure of the middle point of data in a set of data. It means that half of all households earned less than $63,179 and half of all households earned more than $63,179.

In 2018, the average household income in the United States was $90,021.

The difference between the average and the median income ($63,179) is due to the difference between average (mean) and median.

To find an average, you find the sum of all household incomes, then divide it by the number of households. To find a median, you find every household’s income, put them into a list ordered from lowest income to highest, and then find the middle income level.

Median lets you find the income level where half of all households earn more and half earn less. When using a mean, outliers can throw off the result significantly.

For example, consider a town with five households with the following earnings.

• Household 1: $10,000
• Household 2: $30,000
• Household 3: $40,000
• Household 4: $45,000
• Household 5: $10,000,000

The median household income in the town is $40,000. Half of the town earns less and half of the town earns more.

The mean household income is:

($10,000 + $30,000 + $40,000 + $45,000 + $10,000,000) / 5 = $2,025,000

One outlier household creates a result very different from the median.

Household income can vary widely based on the part of the country you live in. It also tends to change from year to year.

For example, in 2018, the median household income for the entire United States was $63,179.

For states in the Northeast, the median that year was $70,113. States in the South had a median household income of just $57,299.

Many factors can explain the difference in household income, including the type of jobs available and the cost of living in a particular area. Places with a high cost of living, like major metropolitan areas, tend to have higher household incomes as the people who live there must earn more to support themselves. Regions with high-paying jobs also tend to have higher household incomes.

Areas with lower costs of living or higher rates of unemployment tend to have lower household incomes.

Generally speaking, household income increases year to year. Inflation tends to make money less valuable, so people must earn more to keep their spending power. Some economists track (inflation-adjusted) real median household income changes compared to the previous year rather than simple household income to account for inflation. Economic downturns and recessions can reverse this pattern as higher competition for jobs decreases wages and unemployment increases.

For example, average household income dropped from $60,985 in 2007 to a low of $55,900 in 2012 due to the 2008 financial crisis. Between 2012 and 2018, average household incomes rose back to $63,179 as the economy escaped recession and began growing again.