A couple of comments by readers got me thinking about typical wages again. In the process, I realized that even the federal government does not know what a "typical" worker in the United States earns.
This came as a shock to me. With the frequent publication of average household income statistics, wage and salary reports, etc., by the Census Bureau, Bureau of Labor Statistics, Internal Revenue Service, Social Security Administration, and other federal agencies, I had assumed there was a well-defined typical annual wage.
Here is a pop quiz: how much do you think the typical worker in the United States earns in a year? See if you are earning what is typical for your job by using the PayScale salary calculator.
What is a “Typical” Wage?
The US government has many measures of workers’ earnings, all of which are rigorously defined, and statistically valid.
The problem is with my question: what do you think of when I say typical worker earnings?
- What the average family of 4, with 1 or 2 wage earners, makes in a year on the job?
- What the typical single employee, working a full-time job, earns in take-home pay?
- What the median household has in income?
- What the median 40 year-old worker, with a full-time job, earns?
I suspect that you thought of an employee not unlike yourself, when you thought of typical.
Of course, everyone is different. How would you handle these confounding factors in your calculation of typical worker’s wages?
- Part-time workers
- The unemployed: do they count as wage earners with $0 income, or leave them out?
- Use the median (1/2 make more, and 1/2 less) or the mean (total income divided by number of workers)?
- Non-wage income (investments)
- Calculate annual salary, or the hourly wage?
- For an hourly wage, what about jobs that require more than 40 hours a week, with no overtime; count the actual hours worked, or only the official hours?
- Count multiple part-time jobs separately, or all jobs a person does together?
- Wages before or after taxes?
- Wages earned under the table (not reported to the government)
Each of these choices changes the answer for any measure of typical wages, often dramatically.
For example, teachers are pretty well paid, relative to other jobs, if you consider only their hourly wage for official hours. However, teachers are much lower ranked, if you consider annual salary, or include actual hours worked.
W-2 Wages Are Where It’s At!
The measure of typical wages I like best is the one the Social Security Administration (SSA) uses to adjust Social Security Retirement payments.
The SSA calculates the “national average wage index”. The idea is that, if you worked for an hour in, e.g., 1965, you would get retirement benefits today proportional to how much you would earn doing the “same” hour’s work today.
The SSA uses the arithmetic mean of W2 wages per worker to calculate this index. In addition to the mean wage they use for indexing, the SSA also reports a median of these wages.
I like the median of these “W-2” wages. It feels to me like what the typical worker earns on the job in the US. Note the choices this index has made against the factors above:
- Part-time workers: included
- Unemployed: excluded, if unemployed for the whole year; otherwise treated like part-time workers
- Median: avoids the “Stephon Marbury” effect, and feels more like the “middle”; half of workers make less and half make more than the median
- Only money earned on the job: no investment income
- Annual total compensation (salary): includes salary, hourly wages, bonus, commission, tips, and any other “cash” wages reported to the government; health insurance is out, but cash contributions to a 401K are in.
- Ignores the hours worked problem: includes people working 5 hours a year the same as people working 80 hours a week at two jobs
- Multiple part-time, or different employers during the year, are all added together for a worker: Two part-time jobs paying $10,000 each is equal to one full-time paying $20,000
- Before taxes
- No under the table income
And the Answer Is…
And the answer is (drum roll please):
- The “typical” US worker earned $23,962 in 2005
That is not a typo: the “typical” worker earned on the job less than $25,000 in 2005 in reported income.
When I asked my co-workers what the average worker earns, they guessed $35,000 to $45,000 per year. Why the big difference?
The most common statistics quoted in the press are average (mean) values, not medians. The press also favors household income (representing the work of multiple workers), and often focuses on the “typical” family of four.
If we use the mean instead of the median, the “typical” wage income jumps to $36,953 for 2005, more inline with what my colleagues expected.
Concluding, Unscientific, Postscript
Because I am most interested in people like me, I looked at what median wage was for US men, 35 to 45 years old in the W-2 data.
Unfortunately, I could only find W-2 wages for 1993. I compared that with the median of all workers in 1993, and came up with an adjustment factor. Applying that factor to 2005 median wages:
- The typical US 35-45 years-old male worker earned $43,000 in 2005.
For the readers who said $40,000 and even $80,000 is not enough, note that half of all men in their prime earning years earn less than $40,000, and 75% earn less than $80,000.
So it goes; this is another example of the general principle that all aggregate statistics lie; they simply cannot tell the each person’s whole story. There is no one typical worker, or typical worker’s wage.
One last pop quiz: how much would you have to earn to be rich? Have a number in your head? Now read the next line.
I bet you said twice what you are currently earning. What does that say about the average American’s psychology? 🙂
If you earn twice $24,000 per year, you may already be “rich” to half the working population…
Cheers,
Al Lee
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