Individual or family income—which is better to understand economic wellbeing?

If we’re interested in understanding the economic wellbeing of Canadians, is it better to look at individual or family incomes? The answer is, it depends.

If you want to examine how much people earn and the full range of salaries in Canada, then individual incomes are appropriate. And if you’re interested in comparing incomes earned by gender or age or race, then individual incomes are again the better choice. However, if you want to understand the living standards of Canadians then the appropriate unit of measurement is what Statistics Canada calls an “economic family.”

Statistics Canada defines an economic family as a group of two or more persons who live in the same dwelling and are related to each other by blood, marriage, common-law union, adoption or a foster relationship. This unit is important because it’s expected that members of an economic family share the family income and share resources the family owns. This means that the family shares a particular standard of living as defined by the resources available to it. While there are always exceptions, economists regard a shared standard of living as the general rule.

Here is an example to illustrate why the distinction matters. Consider a Canadian family where one spouse is a fully employed professional and the other spouse either doesn’t work or works part-time with a modest income. And suppose, as well, that the family has two adult children in their twenties attending university and who live at home. The two students work part-time, mainly during the summer, and earn less than $10,000 each per year. Now, if we examine just individual incomes, we have one fully employed professional earning an income well above average, another person (the spouse) earning a near poverty level income and the two students with incomes well below the official poverty line. That’s accurate if all you’re interested in is individual income but this doesn’t accurately capture the real living standard of the family. An accurate assessment of the family’s living standard would likely be “upper middle class” as all members of the family share the resources available to the household.

This scenario is by no means rare. The available data tell us that about 27 per cent of couple families with children are single-earner. Among dual-earner families, about 25 per cent have one spouse working only part-time. And of course, now there are many more adult children living with their parents than ever before. In Canada, roughly 35 per cent of young adults aged 20 to 34 and nearly half (45.8 per cent) of those in their twenties live with at least one of their parents.

There may be good reasons to examine individual incomes—for example, to compare the earnings of truck drivers or school teachers or carpenters in different regions of Canada. However, researchers are often interested in comparisons of economic wellbeing. To do that, there must be a way to determine how income is shared within a family and how to compare the economic welfare of families of different sizes. For this purpose, researchers use a device called an equivalence scale. For example, we know that a two-person household does not require double the income of a single person household to enjoy the same standard of living. This is because the two people will share many of the household resources such as the television, refrigerator, washing machine and often the same bedroom. A commonly used equivalence scale is that to have the same level of economic wellbeing, a family of two requires about 1.4 times the income as a single-person household. Correspondingly, a family of three requires about 1.7 times the income as a single person and a family of four requires about two times the income. These values are based on empirical studies of how families actually consume (though recent research has indicated the values may need to be lowered). This allows us to make comparisons of living standards across all households. This information is of central importance when we want to examine questions about poverty and economic inequality.

So, while comparing individual incomes is sometimes the right measure, when thinking and researching about poverty and wellbeing, it’s critical that households, not individuals, are examined. And that we normalize across different households to ensure, to the best of our ability, we’re comparing like-to-like households.

This is the third essay of a five-part series on income inequality, which will appear on the Fraser Institute blog. The authors would like to recognize the critical contributions of the authors of the various essays in the 2017 collected series on inequality and poverty as well as Christopher Sarlo’s three decade-plus work on poverty and inequality for the Institute. In addition, the authors thank Christopher Sarlo for his work on early drafts of this series.