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Montana Labor Market Blog

Research & Analysis Bureau - Montana Department of Labor & Industry

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Measuring Money

In economics, there’s rarely such a thing as an easy answer.

For instance, a seemingly simple question about how to measure how much money the average Montana family makes has several different answers, depending on nuance.  Economists are VERY interested in measuring how the average person benefits from economic activity, so there are multiple ways to examine monetary benefits. Let’s examine a few ways to measure income:

Wages

Wages are the best measure of what the average person earns by working. Because most people earn the majority of their incomes by working, this is a good way to measure whether the benefits of economic activity are being widely distributed.  If you want to talk about what’s going on in the life of the average Joe or average Jane in Montana, average wages are a good metric to use.  Yet, wages does not include any money earned by most farmers, real estate agents, construction contractors, or property owners who operate as self-employed or as a business owner.  That excludes many Montanans.

Income

Income includes wages, plus other ways to make money, such as investments (including dividends received in your retirement account), royalty payments (from platinum record sales if you are Beyonce, but more typically from mining if you are Montanan), rental income (from commercial or residential property, or from agricultural or grazing land), and owning a business. Given that Montana has a fairly high rate of business ownership and a high rate of getting money from alternative sources, income is a better measure for the economic well-being of the state. Income is typically measured in four ways:

 

Household median income

Households are defined as people who live in the same residence. These individuals may or may not be related, and may or may not pay taxes jointly.  Five college students living in the same rented house would be considered the same household, as is a single person living in the house they own.


Family median income

Families are a subset of households and include two or more people related by birth, marriage, or adoption residing in the same housing unit. Family median income would exclude both the unrelated college students living together and the single person, but would include two sisters who are sharing living quarters.


Individual median income

Median income for individuals over 16 who likely get income from multiple sources. The individual median income is the most typical measure used to determine whether individuals are making progress towards prosperity because it includes all types of income and because it includes everyone, regardless of family status.


Per capita income

Total income divided by total population. This measure tends to be skewed by demographics. For example, areas with a high level of young or old people with low income will have low per capita income even if wages are high.

 

GDP per capita

GDP divided by total population. This is the same concept as income per capita, but using Gross Domestic Product. GDP and income are very similar, so this metric should be similar to per capita income.

Median vs. Mean

In addition to the multiple different concepts of income, there are two different summary statistics used to measure money and income-related metrics – the median and the mean.  The mean measures the average of the levels of income.  The median is the central point in the distribution, with half of the values above that point and half below.  Typically, the median is used when discussing income because very high wage earners skew the mean higher than the "average" person.  However, some data sources (like the one to measure average wages) only allow the calculation of the mean because of the way data is gathered.

In short, there are many different ways to measure the amount of money a typical Montanan makes, but income metrics do a better job of measuring income from multiple sources, while wages are an important metric to understand how the average person gets ahead in life. Income is typically presented as a median because it better represents the average person, but the average is used for wages because of the way the data is gathered. Each of these data sources also come from different agencies, with the U.S. Census Bureau publishing wages and income metrics, the Bureau of Economic Analysis publishing the per capita data for both personal income and GDP, and the Department of Labor publishing wage data. Each of these agencies has a slightly different reason for wanting to know the monetary gains of the population, which results in the multiple different ways to measure income. 

How much money does the average Montanan make? That depends on why you are asking the question.  

Categories: Labor Market Info-101

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