Household Income

HOUSEHOLD INCOME IS regarded as a critical variable for measuring the economic well-being of families and households and an important indicator of household welfare and poverty status. Increases in income in the long run contribute to an improved quality of life, because income provides the means to obtain nutrition, health, education, and overall socioeconomic status. Household income provides resources for household consumption and provides an indication of potential future consumption. Household debt and credit also have an effect on household consumption patterns and well-being outcomes. Credit may add an immediate effect on cash resources for consumption expenditures, while debt repayment will do the opposite. The consumption and investment pattern of a household is of course subject to a system of separate individual decisions and activities.

Household income generally consists of the combined gross money income of all persons who occupy a single housing unit. Household income can be composed of the gross money income earned by one or more families, one or more unrelated individuals, or a combination of families and unrelated individuals who occupy a single housing unit.

Household income is a flow variable defined within a specified time period, usually one year. It generally consists of the sum of inflows from all sources, including wage income or salary income, net income from entrepreneurial and farming activities, rental income, pension or retirement income, remittances received, government transfers, investment income, and gifts. In practice there is considerable variation in terms of which categories of inflows are included in the measurement of income. Even when comparability of components is consistent across countries, international comparisons require some way to compare the purchasing power of a given income in different countries.

Household income can be very difficult to measure reliably and accurately, and it is commonly understood that income tends to be underreported in survey studies. Because it is made of multiple sources there can be great variation in which components may be included in any one measurement, which makes comparability of data limited (across countries, across studies). Respondents often regard income as personal and confidential information; thus the accuracy of self-reported data is questionable.

Additionally, because of multiple sources of household income, it is necessary to gather information on all the sources and it may not be easy to identify all of them. Formal sources such as wage employment are easier to track than informal sources, such as odd jobs or informal self-employment earnings. Additionally, if one assigns value to in-kind contributions such as food, or if the time of household members is valued, then the imputed value of maintenance activities such as meal preparation, washing clothes, or childcare might be included in a calculation of household income.

Other issues also affect the accuracy, reliability, and comparability of data collected on income. Collecting accurate data on a flow variable is more difficult than collecting data on a stock variable like assets, which can be measured at one point in time. Further complicating the picture are fluctuations in income flows. Income flows may vary widely during a defined period of time. Collecting income over a longer period of time such as a year can help account for the effects of fluctuations. The more frequent and regular the intervals that income data can be collected, the greater the accuracy. The real value of income must also be taken into account. Comparing household income over time must take into account changes in the value over time, such as inflation, and be adjusted accordingly in order to compare household gains or losses over time.

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