Sunday, July 27, 2014

Household Income

The headline read: HOUSEHOLD INCOME IN SERIOUS DECLINE. I thought "gee, that sounds serious" so I decided to give it some thought. I would try to consider the issue in terms that I could understand and express and not rely on someone else to tell me what was happening and what it meant. Economics sounds impossible to understand anyway so I made my model as simple as possible.

I started with one family in one household. They've been married for 25 years. He's an engineer who makes $100k per year. She's been a housewife and is licensed to sell real estate. She's had a part time income of $30k per year. They have one child who has just graduated from college. They're very proud. So the household income in my model at the first year is $130k per year.

But there's trouble in paradise. It turns out, that the husband and wife really don't have much in common besides the child, who will now be leaving home, and don't want to remain married. And so they divorce. Now the model looks like this. He is an engineer and still has an income of $100k per year. She now sells real estate full time and has an income of $75k per year. Their child has (as mentioned) graduated from college and has accepted a job offer of $65k per year. So the total income is now 100 + 75 + 65 = $240k per year but the number of households is three instead of one, so the average household income in my model is $80k per year down from $130k per year which represents a 39% decrease.

In my model (simple though it may be) there was a 39% decrease in household income but it can easily be argued that no one suffered financially from it. I'm not arguing that this is how things are in a larger economy at all, but I do think it important to realize that when looking at economic headlines one must try to break free from the story that's already running in ones head and the one the headline writer wants to tell. In the case of households there are many factors that effect the "household" income. How many people in the household? (Lower marriage rates and smaller families will result in lower household income). The age of the household. (Younger families or individuals will have fewer skills, and less experience and so will naturally have less income. In a growing population the "household income" number will decline on its own even in an unchanging economy). How many households are being considered? (Even in an economy where individual incomes remain constant "household" income will change based on the number of households used in the calculation).

Also to be considered is the motive of the people who bring you the news of the declining or increasing statistic. What is it they want for you to think and why?

But then that's just what an average guy thinks.