What Is Income Per Capita?
Income Per Capita Explained
Income per capita is a measurement of the income earned per person in an area. It estimates the earning power of an individual. It's also used to describe the standard of living in a city, state, or country.
The average income per capita is the total income for the area divided by the number of people. But if you have a few extremely wealthy people, they will raise the average. That makes it seem like people have it better than they really do. The average income per capita can be misleading.
For that reason, most economists use median income per capita. The median income per capita is the point where half the people earn more and half earn less. It adjusts for the few extremely wealthy people.
What Is the Current U.S. Income Per Capita?
The 2018 nominal median income per capita was $33,706. Because there are quite a few extremely wealthy individuals in America, the mean is much higher. In 2018, the mean income per capita was $50,413. The Census Bureau reports it in the Current Population Survey, Table PINC-01.
How Is U.S. Income Per Capita Measured?
The U.S. Census surveys per capita income every 10 years. It provides a revised estimate every September. The Census calculates per capita income by taking the total income for the previous year for everyone 15 years and older. It then provides the median average of that data. The median is the point where 50% of all individuals are above, and 50% are below. The calculation of the per capita income includes three different components.
First, the Census figure includes earned income—including wages, salaries, and any self-employment income. It does not include borrowed money, withdrawals of bank deposits, tax refunds, gifts, and lump-sum inheritances of insurance payments.
Second, the Census includes investment income including interest, dividends, rentals, royalties, and income from estates and trusts. Capital gains and money received for selling your home are not included.
Finally, it includes government transfer payments. That includes Social Security or Railroad Retirement, Supplemental Security Income, public assistance or welfare, and retirement, survivor, or disability pensions. It does not include food stamps, public housing subsidies, or medical care.
Three Other Income Measurements
There are three other widely-used measurements of income. Average household income is the most common in the United States. It tells you the income per household, which contains about 2.5 people on average. That's why it's higher than income per capita.
GDP per capita is another measure of income. It takes the total gross domestic product of a country and divides it by the number of people. It's equal to the income earned by all residents and businesses in a country. It doesn't matter if they are U.S. citizens or living in the country illegally, as long as they are within the geographic boundaries.
GDP per capita doesn't include income earned from foreign investments. For example, if a company exports and sells products overseas, GDP doesn't include that income. To compare GDP per capita across years, you need to remove the effects of inflation. That gives you real GDP per capita.
Gross national product measures all the income earned by a country's citizens and businesses, regardless of where they made it. For example, if a company exports and sells products overseas, it does include that income. It doesn't count any income earned in the United States by foreign residents or businesses. It excludes products manufactured in the United States by overseas companies. In 1993, the World Bank replaced GNP with Gross National Income. It provides GNI per capita for each country.
Trends and Changes in Income Per Capita
Median per capita income is the highest in U.S. history. It's almost 15 times greater than in 1967 when the Census first measured per capita income. At that time, the median income per capita was $2,464.
But that doesn't take into account inflation. In 1967, the value of the dollar was higher than the dollar's value today. That $2,464 could buy the same as $19,202 could in 2020. In other words, per capita buying power has almost doubled.
Even though the U.S. per capita earning power has improved since 1967, it hasn't been a steady increase. It declines during recessions and bounces up when good times return.
Since 1967, earning power fell five times: During the 1974 recession, the 1981 recession, the 1991 recession, the 2001 recession, and the 2008 recession.
That most recent recession was the worst. In 2006, a person's buying power was $32,900. That fell to $30,653 by 2010. It didn't regain and surpass the 2006 level until 2015 when it hit $33,549.
Factors That Impact Income Per Capita
It can take a long time for a country's earning power to improve. During the Great Recession, unemployment meant too many people couldn't find work to get wages. That didn't turn around until 2015 when earning power returned to 2006 levels.
Over the long-term, there are three major factors at work. First, wage pressure from low-paid countries China and India put downward pressure on wages around the world. Global companies outsource jobs to these countries, which allows them to pay U.S. workers less. This leads to greater income inequality. Those whose jobs can be outsourced receive low wages. Those at the top, like the CEOs, high-level managers, and owners of the companies, are relatively immune to wage compression.
Another cause of low per capita income is technology. The increasing use of robots and computers has replaced many workers in manufacturing and even office jobs. Meanwhile, those with the skills to manage the equipment are in high demand and earn more income.
The third cause is the rising cost of education. According to the College Board, the price of tuition and fees in public colleges continue to rise year over year. Among Americans aged 25 to 34, only 49% have a college-level education. It's better in 9 other countries. Korea tops the list with 70% of its young people having a college education. Fewer than 30% of American adults have more education than their parents. As a result, economic mobility has worsened.
Now that the U.S. is officially in a recession again as of February 2020, there may be declines in earning power and income per capita again, as many people remain unemployed as a result of the coronavirus pandemic and statewide stay-at-home orders.
Federal Reserve Bank of St. Louis. "Real Median Personal Income in the United States." Accessed June 18, 2020.
Federal Reserve Bank of St. Louis. "Real Mean Personal Income in the United States." Accessed June 18, 2020.
U.S. Census Bureau. "PINC-01. Selected Characteristics of People 15 Years and Over, by Total Money Income, Work Experience, Race, Hispanic Origin, and Sex." Accessed June 18, 2020.
U.S. Census Bureau. "Current Population Survey - 2019 Annual Social and Economic (ASEC) Supplement," Page 1-1. Accessed June 18, 2020.
U.S. Census Bureau. "Current Population Survey - 2019 Annual Social and Economic (ASEC) Supplement," Page 7-3 to 7-5. Accessed June 18, 2020.
U.S. Census Bureau. "Historical Households Tables," Download "Table HH-6: Average Population Per Household and Family: 1940 to Present." Accessed June 18, 2020.
The World Bank. "Why Can’t I Find Estimates of Gross National Product (GNP)?" Accessed June 18, 2020.
U.S. Census Bureau. "Historical Income Tables: People," Download "All Races." Accessed June 18, 2020.
College Board. "Average Published Charges, 2018-19 and 2019-20." Accessed June 18, 2020.
National Center for Education Statistics. "International Educational Attainment." Accessed June 18, 2020.
Scott G. McNall. "The Problem of Social Inequality: Why It Destroys Democracy, Threatens the Planet, and What We Can Do About It," Page 47. Routledge, 2015.
National Bureau of Economic Research. "Determination of the February 2020 Peak in US Economic Activity." Accessed June 18, 2020.