Median vs Average Household Income: What is the Difference Between These Indicators, and How to Interpret Them

On our income maps in the MBCDP, both median and average household data are frequently presented.   These terms can be confusing if you don’t know the difference between them, how they are calculated, and how to compare and use them. 
Definitions: 

• Median Household Income:  Median household income refers to the income level earned by a given household where half of the households in the geographic area of interest earn more and half earn less.  The median household income is calculated by rank ordering all households by ascending income and then identifying the income of the most middle household .. i.e. the household that has an equal number of households above and below it.  Median household income is the income cut-off where half of the households earn more, and half earn less.
• Average Household Income:  Average (or mean) household income on the other hand is calculated by dividing the total household income in the target geography by the number of households.   Average household income is the income that all households would have if the total income of all households combined was equally distributed among all households.

Median Household Income is a more accurate summary measure of income: 
Median household income is a more robust and accurate measure for summarizing income at the geographic level as compared to average household income since it is not affected by a small number of extremely high or low income outlier households.   

• In a geographic area, for example, where there happen to be a small number of extremely high income households and a large number of lower income households, the average income can become inflated and give the false impression that all households on average have more money than they actually have.  The median income on the other hand is completely unaffected by high-income outliers and therefore better reflects the income status of the majority of households.   

How to Interpret Median and Average Household Income: 

• If the median and average household incomes are close to equal, this means that either measure can be used to accurately summarize household income at the geographic level.  
• If the average household income is greater than the median household income, this means that there is significant income disproportionately concentrated in the wealthiest households.  In this situation, median income provides a more accurate estimate of the income available to the majority of households since its value is not affected by the high income households.     

A Worked Example: 
Take a look at the article, What the difference between mean and median tells us about income inequality.  This article provides concrete examples of how mean and median are calculated and how to interpret them.