Socioeconomic Standing, Age & Where We Live

by Team Dinks on May 3, 2010 · 2 comments

The other week, I talked about asset diversification involving our biggest physical asset (our house).   I felt that how we treat our house in our investment portfolio and what kind of house we buy is not properly understood, so I brought in an economics toolkit and went to town. This week, I’ll be focusing my efforts on correcting an article that the big man himself,Mr. BudgetsareSexy, wrote on his blog: Are you middle class? (and should you care?)

Rather than answer how “middle class” or “upper class” are defined, I’d instead like to point to the New York Times’ online piece “How Class Works“. It is a nifty little tool and shows a few dimensions of social class.  Class is broken down into 4 categories:  occupation, education, income, and wealth.

What exactly is middle class income?  Median income for a household of 4 in the United States is 81,000 according to the US Census.  And normally, we evaluate our standing by looking at how our income compares to that of the median. But the median is misleading for many reasons. (Median Income = what the person right in the middle of the distribution of incomes makes.  This is not an average, as averages can be distorted by lows or highs on the extremes)

However well the New York Times did their research, they make two critical mistakes that I want to highlight this week because these mistakes are important in how WE evaluate how well we are tracking towards our goals – and are important if WE are deciding between various job offers.

First up is the idea that the average or median is a poor metric because of geographical diversity in the costs of living.  Running a Cost of Living tool from CNN Money I find that that if I earned the “average” $81,000 in Washington DC, I would be just as well off living in Atlanta, GA as someone making $55,000.  This is a difference of $26,000 or 32%!  And this is one example among millions.  Failure to account for cost of living creates a bias in the whole notion of whether you have middle class income or not.  Sadly, there are very few location-based adjustments in taxes so that the 81K earner in DC is taxed liked their twin 55K earner counterpart in Atlanta.  So maybe, all things being equal, you’d be better off living in Atlanta and earning 55K.

Additionally, the New York Times survey doesn’t include differentiation by age. If we’re talking class, or how we’re doing relative to our parents, we’d want to know :

  1. Where were my parents when they were X?
  2. Where am I now that I am age X?

And yet, this important distinguishing characteristic is noticeably absent from the calculators on NYT and on BudgetsareSexy.  The “tests” that allow us to check where we are in terms of socioeconomic standing are ignorant of our age or where we live. That doesn’t make much sense.

If you really want to see where you are in the world, head over to GlobalRichList.com.

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{ 2 comments… read them below or add one }

1 James May 3, 2010 at 9:11 am

Interesting. What this also doesn’t discuss is the subjective nature of wealth.

2 CoffeeCents May 3, 2010 at 9:33 am

James,

Indeed it does not. There is only so much that can be covered in 500 words or less. On wealth, it is very important to note that given 2 HH’s who differ by say, 20K in income, that they are not unequal by 20K in utility, because income (like many other things) has what we economists call “Diminishing Marginal Returns” (The first hot dog is great, but the 12th?)

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