I’ve written a new version of this post with updated numbers for 2013, which can be found here

There are a couple of pieces  in the News Ltd papers today which advance the view that the Government is practising unconscionable ‘class warfare’ by reducing the benefits paid to families with incomes above $150 000 a year. In The Australian’s piece, a couple on $200 000 a year (who admit they pay only 18% tax) complain that they may be forced to get a nanny if their childcare subsidy is reduced.

Now, The Australian itself has called for reductions in ‘middle class welfare’, so either the editors have changed their mind, or they have a misguided sense of what constitutes a middle income in modern Australia.

I don’t doubt that the family featured in The Australian’s story genuinely thinks they’re more or less typical, but they’re wrong. We all tend to judge what’s normal, or typical, with reference to those we work and socialise with. This leads the poor to underestimate the wealth of the rich, and leads the rich to overestimate the wealth of the poor. It also means that a lot of us tend to think we’re ‘middle class’ when we’re not.

Andrew Leigh (before he was an MP) wrote a great little paper on the effect that this misperception has on our public debate, called The Political Economy of Tax Reform in Australia. In it, he argued that

opinion leaders [do] not properly appreciate the distribution of income in Australia. For the most part, the taxation rates applying to most politicians, journalists, business executives and think-tank staffers (and indeed, to academic economists) are not those that apply to the average voter. In all these professions, six-figure salaries are common. Yet only 4.5 per cent of Australian adults have an income that exceeds $100,000 per year, and only 1.5 per cent have an income that exceeds $150,000 per year.

(The paper is from 2006, so the figures are a little out of date, but the principle hasn’t changed).

Leigh also, correctly, notes that “reporting of ‘average’ income in Australia focuses on a measure of earnings which is not that of the typical voter.” Journalists often use average weekly ordinary time earnings for full time adults (AWOTE) as a measure of a typical income. This is misleading for several reasons.

First, not everyone works. AWOTE measures only those who have earned income. Second, people have sources of income other than employment (transfers from the Government, dividends, rent, capital gains). Third, AWOTE excludes part time workers, and therefore excludes a lot of low-income earners.

Fourth, AWOTE represents mean earnings, not median earnings. This is a very important point. The mean income of drinkers in a pub goes through the roof if Bill Gates walks through the door, but the typical drinker has become no better off. For this reason, the median is a much better measure of a typical person’s income, as it is not distorted upwards (or downwards) by large changes in the tails of the distribution. This is a point that we all should recall from Year 8 maths, but for some it is apparently a difficult point to grasp.

So, what does the typical Australian worker earn?

If we’re only interested in wages, and only interested in people who work, then that’s a fairly easy question to answer. AWOTE is $66 445 per year. However, we know that’s a problematic measure of the earnings of the typical person. Instead, we can look at the median earnings of all full time workers, which is $54 750 per year.

See how much the figure drops just by looking at the median instead of the mean? In case the whole mean vs median thing hasn’t sunk in, this figure means that half (50%!) of all full time workers in Australia earn less than $54 750 per year, or at least they did in August 2010 when this survey was taken.

What if we broaden our scope a little, to look at all employees? After all, politicians aren’t only concerned about full time workers. Well, the median earnings of all employees is $44 146 per year. Half of all workers earn less than $44 146 per year.

However, we don’t all work. In fact, a lot of us don’t.

So, what is the typical Australian’s income?

To answer this question, I like to use the tax statistics from the ATO.

Half of all Australian taxpayers had taxable incomes below $44 546 in 2008-09.

It’s starting to seem as if $200 000 is quite a lot of money, isn’t it? In fact, 98% of taxpayers have incomes below $180 000. Mr Gray, the man in the Daily Telegraph’s story, earns $150 000, which would put him in the top 3% of taxpayers by income (or at least it would’ve in 08-09). Quite how this makes Mr Gray a “middle income earner” escapes me.

One objection at this point would be that I’ve been talking about individuals’ earnings or incomes, rather than households. After all, families tend to pool their resources and spread their costs.

So, what is the typical Australian family’s income?

The latest ABS figures on the distribution of household incomes are for 2007-08. They show that the median gross household income was $67 003 a year, less than half what the $150k-$200k “battlers” of News Ltd’s imagination scrape by on.

Note that the mean gross household income was $85 983, which shows you again that using the ‘average’ can give you a very distorted idea of what is typical or ‘middle’.

However, there’s a problem with using these figures. The problem is that these ‘gross’ household income figures don’t take into account the fact that we all live in households of very different sizes. A household with two adults and no kids will face lower costs and have a higher standard of living than a household with two adults and two kids, even if their incomes are the same.

We need a way to compare the living standards of people across different household types, to get a measure of how much income a person would need to maintain the living standard of the typical (median) Australian. This is known as equivalised household disposable income.

So, what is the median equivalised disposable income of Australian households?

The median equivalised disposable household income for Australia in 2007-08 was $36 082 according to the ABS, and $35 664 according the Melbourne Institute’s HILDA survey.

This means a single person, living alone, would need around $36 000 in disposable income to sustain the typical Australian’s standard of living. Following a widely-accepted methodology, each additional adult adds $18 000 to this figure, so a childless couple would need a disposable income of $54 000 a year to enjoy a median standard of living. Each child adds $10 800 to this figure.

A couple family with two children would therefore have needed $75 600 disposable income in 2007-08 to have the same standard of living as the typical Australian. The family in The Australian’s story has a gross income well over double this amount, and disposable income that is still more than double the median. They are far from typical.