What Is Middle Class Income?

Here's a test, according to the 2012 census we know the following:

Persons Below poverty level (2008-2012):
14.9% [1]
Persons per household (2008-2012):
2.61 [1]
Median Household Income (2008-2012):
$53,046 [1]

Ignoring savings, lifestyle differences, and region of the country. Purely based on income, what does a family have to make to be considered "Middle Class"? Go ahead, think of your answer, I'll wait...

Ok, got it? Let's try to figure this one out.


If you ask a handful of people what the income level of the middle class is you will probably get wildly varying answers. Surprisingly enough, almost everyone you ask will also tell you that they are in the middle class too. During the last election cycle both Romney and Obama said that the cutoff for the middle class was an income above $250,000. I don't know about you but I think that the majority of Americans will probably disagree and say that if you have an income of over $200,000 you are part of the upper class, not the middle. What's funny is that US Senators make $174,000 per year so I guess that means that they think that they're middle class. If their spouse works or they have investment income, they probably get pushed over the $250,000 limit anyways.

Common Middle Class Definitions

After my own research I found wildly varying definitions of what the middle class might be, some people say that "the middle class is a state of mind." I think that's a total cop out answer because everyone can't be in the middle class. We aren't passing out Ms. America prizes here, so trying to appease everyone is not an option.

Some other definitions are based off of your net worth, or if you can save X% of your income or that X% of your income was discretionary income.

Crap, crap, and more crap. Doctors and Lawyers can be making over $200,000 per year but start out with a negative net worth because of student loans. They also might not be able to save because they are paying down debt. Then there's millions of people that are bad at budgeting or just don't know how to control their spending. Peoples spending/saving habits shouldn't dictate if you are a middle class earner or not. All that tells you is how good of a saver or spender they are.

Side Note: The census says they have no official definition of the "middle class" [2]

Because of these reasons I want to focus on what a middle class income is. Without savings, lifestyle differences, and region, I want to just look at income levels and try to find an answer that makes sense.

My first step was to look at income data, so I turned to the census data for 2012. This seemed like the most unbiased data that I could readily get a hold of. Using the 2012 household income distribution data [3] I was able to graph out what the distribution of household incomes were. Please keep in mind that this data is per household, not per individual. I also added other pieces of data which I think will help us visualize the data better.



What is Middle Class?
(click to view larger version)

You can see that I added the red line on the left to show the poverty threshold for an average household. I think that we can all agree that anything below this line is not middle class because even the government has decided that they do not make enough money to get by on.

I have also added a green line to show where two workers making the federal minimum wage ($7.25/hr) would fall within the data. Also, I believe that it's called a minimum wage for a reason, I don't think that minimum really qualifies as "average", and the middle class should encompass the "average person" not the minimum.

But why is the green line beyond the peak of the graph? Shouldn't two people earning minimum wage be where the majority of people fall under?

Well, to answer that we need to define the number of workers in the average household. I know that there are a lot of households that are a single worker with no children. A good portion of my friends actually fall under this category. Then there are households with children that do not work, I seem to have a lot of friends that fall under this too.

Since the peak of the graph is to the left of the green line, I would guess that this is due to the large number of single person households. In fact, the poverty line is almost exactly where a single person making minimum wage would be. Coincidence? Probably not.

Now this is where we have to start taking some educated guesses. I'm going to use the spherical cow method [5] to estimate this.

What?! Spherical cow? Now you're just making things up.

No. I'm not actually, the spherical cow is a real thing. (But I may have chosen to use it because of the name.) It's basically a way of simplifying the data to a point where we can make some easier calculations and our guess should get us into the relative ballpark for the answer that we are looking for.

The Spherical Cow Method
For example, what if we shoot a cow from a cannon into the grand canyon, how far would it go before it hit the bottom? Some things to consider might be:
 
How does the cow rotate in the air?

Is there any wind to consider?

 
Is the cow going to flail in the air or do we have a frozen cow that was donated to science?
 
As you can see, the problem gets complicated very quickly so we can simplify the model we are using to get us a close answer that will satisfy our needs. So, we assume the cow is a sphere since the shape of the cow probably won't matter that much. Then if we know the initial trajectory and force the problem gets simpler to a point where we can solve it.
 
But back to our problem, after some digging I found that from between 1960 to 2000 the number of workers per household has wavered between 1.2 and 1.25 workers per household. [4] Since we know that the average number of workers in a household is about 1.2, and the middle class should be making more than minimum wage let's just round the number of workers in a household up to two and keep the wage at the minimum wage where it is since we are adding slightly more workers. Now we can use the green line as our minimum threshold for a household in the middle class.

Now the upper bound for the middle class might be harder to guess. Normally I would think to try to mirror the lower bound onto the upper end and call it a day. But it's obvious that the data in this graph is skewed to the left, showing us that more people earn lower incomes than higher incomes. So an equal distribution on the bounds won't really work either.

So lets go back to the spherical cow method again, I can guess and say that if you make more money then 9 out of every 10 people you meet, you probably make an above average income. To me this sounds like a reasonable assumption so I have displayed the top 10% of income earners in purple. Let's use this for our upper bound for middle class income.

So for the average household we know the middle class income! (Approx. $30,160 to $147,500) How close were you? I personally thought it might be a little more narrow, especially on the upper end of the spectrum, but I stand by my conclusion unless someone can convince me otherwise.

Interesting note: Romney and Obama didn't even come close to this answer, according to them if the cutoff is $250,000 then they chose the top 2.37% of the population to be in the "upper class". Do you think they were right?

I could not find the same detailed data for California, so that we could get more of a regional comparison. But I did find some data on California that you can use to try to come to your own regional conclusion:

California persons per household: 2.93 [6]
California median household income: $61,400 [6]
California persons below poverty level: 15.3% [6]
California minimum wage 2012: $8.00

If you want to look up some of these details on your individual state you can go here.

 

The Origin of the Spherical Cow


The spherical cow is a theoretical physics joke about modeling a complicated problem into a simple format to get an answer that is close enough to what you need. Here is the joke (so laugh)
There is a dairy farm with cows, and the farmer wants to increase his production of milk. So the farmer hires three consultants – an engineer, a psychologist, and a physicist.

After a week, the engineer comes back and says: “If you want to increase production, get bigger milk pumps and bigger tubes to suck the milk through. This should improve production by 5%”

Next came the psychologist. He said: “You need to make the cows happy to produce more milk. You should paint the milking stalls green. This will make the cows think of grass fields. They will be happier and produce more milk.”

Finally, the physicist came to present his idea. He said: “First, assume the cow is a sphere….”
That's a joke.... You're supposed to laugh now.


[1] - http://quickfacts.census.gov/qfd/states/00000.html
[2] - https://www.census.gov/hhes/www/income/data/inequality/middleclass.html
[3] - http://www.census.gov/hhes/www/cpstables/032013/hhinc/toc.htm
[4] - http://www.fhwa.dot.gov/planning/census_issues/ctpp/data_products/journey_to_work/jtw1.cfm
[5] - http://en.wikipedia.org/wiki/Spherical_cow
[6] - http://quickfacts.census.gov/qfd/states/06000.html

Spherical Cow image created by the author Zee

10 comments:

  1. In my opinion, I think that the 250K figure is right. The percentages of wealth are so off in this country because the top 1 percent is so incredibly wealthy that is skews the figures to make it seem like 250K is richer than it is. It just isn't as much money as people think it is.

    ReplyDelete
    Replies
    1. Hey Holly,

      Well you are absolutely right about the percentages of wealth being off in this country, the top earners definitely skew the information.

      So do you think that the middle class should be defined by how much you earn in comparison to the average household expenses? Such as average mortgage is X, average food expense is Y, average discretionary spending is Z so the middle class should be based off X+Y+Z?

      That is much harder to model and I think it would be very interesting to see.

      Delete
  2. To add some Spherical Cow to the discussion I would point out that cost of living is so different in areas that rich in most areas might not be rich in a place like NY City.

    I do think that a persons own income affects their impressions quite a bit. 20 years ago I would have thought my current income was rich but I definitely do not think that now.

    ReplyDelete
    Replies
    1. I know that certain areas of the country have much different costs of living. It would be completely unfair to compare Manhattan or San Francisco (where I live) to Minnesota, or Nebraska. That is why for the purpose of this article I just grabbed the general US data from the census. I simply did not have the time to try to pull this information for a lot of locations.

      But aside from that point, peoples viewpoints can be influenced by their own earnings. If you think that the the guy in the office next to you makes relatively the same amount you tend to view yourself as more average. But what if you started comparing yourself to workers at a different company? Do you think you would see it the same?

      And yes, time changes things too, I'm guessing that just with inflation alone 20 years would give any income a significant bump. But also during that time hopefully you've moved yourself up the food chain at work too!

      Delete
  3. I love this and have tried to make the similar argument on many occasions. In America, we have this idea that everyone is middle class except maybe Bill Gates. Hardly.

    ReplyDelete
    Replies
    1. Thanks Annie, to me it was just one of those questions I always wondered and when I started researching this I didn't have a clear answer myself. The results of what I came up with did surprise me a little. It was fun to research not knowing what result I might come up with.

      Delete
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