What it means
For a single household, personal income is simply everything that comes in. Salary, side-business earnings, rent from a flat, interest on savings, dividends and benefit payments all count.
The national measure adds these up for the whole country. The national figure is built from several components.
Compensation of employees, which is wages, salaries and employer-paid benefits, is by far the largest. Others include income of self-employed business owners, rental income, income from interest and dividends, and transfer payments such as pensions and unemployment benefits, less contributions to social insurance schemes.
Personal income is different from disposable personal income, which is what remains after personal income taxes. It is the disposable figure that households can actually spend or save, so it is the better guide to consumer spending power.
Analysts compare the two to see how tax changes affect take-home money. Businesses watch personal income because it drives demand.
Retailers, lenders and property developers all use it to judge whether customers will be able to afford their products. Rising personal income supports spending and borrowing, while falling income is an early warning of weaker sales and more loan defaults.
The nuance is that personal income includes transfer payments, so it can rise even when wages are falling. A government stimulus payment, for example, boosts the headline figure without any increase in earnings from work.
Analysts therefore look at the components and not just the total.
In practice
Real-world examples.
Example
A retail chain studies personal income by region before opening new stores. It picks areas where incomes are rising faster than the national average, because shoppers there are likely to spend more. It also compares those areas with the cost of rent and land, to see where margins will be best.
Example
A bank economist sees that personal income rose 0.4% in a month, but nearly all of the gain came from government transfers. She warns that the underlying strength of wages is weaker than the headline suggests. Her clients adjust their lending forecasts to reflect the slower growth in pay.
Example
A household with a salary of $90,000, $3,500 of dividends, $1,500 of interest and $15,000 of rent calculates its personal income. The total is 90,000 + 3,500 + 1,500 + 15,000 = $110,000, before income tax. If the household pays $18,000 of income tax, its disposable income is 110,000 - 18,000 = $92,000.
Formula
Calculation
Personal income = compensation of employees + proprietors' income + rental income + income from interest and dividends + transfer receipts - social insurance contributions
Suppose an illustrative economy reports, in billions, compensation of $15,000, proprietors' income of $2,000, rental income of $800, interest and dividends of $3,000, transfers of $3,200 and social insurance contributions of $1,500. Personal income = 15,000 + 2,000 + 800 + 3,000 + 3,200 - 1,500 = $22,500 billion. If personal taxes are $2,500 billion, disposable personal income = 22,500 - 2,500 = $20,000 billion.Case study
Seen in the real world.
Brookfield Homes is an illustrative, fictional builder deciding whether to launch a new development in a mid-sized city. The sales team noted that the city had a strong job market.
The market analyst looked at personal income by component. Total personal income per person had risen 6% in a year, but wages had grown only 2% while transfer payments had risen sharply because of a temporary government programme.
She concluded that buyers' underlying capacity to afford a $350,000 home was weaker than the headline suggested. Brookfield reduced the first phase from 120 homes to 60 and waited for wage growth to confirm the trend, and the illustrative lesson is that the make-up of income matters as much as the total. The analyst also set a rule to review the income components every quarter before releasing each new phase of homes.
Watch out
Common mistakes.
- Confusing personal income with disposable income, when taxes separate the two.
- Reading a jump in personal income as a sign of stronger earnings, when it may come from temporary government payments.
- Using total personal income without dividing by population, which makes large places look richer than small ones.
Questions
People also ask.
Does personal income include capital gains?
In the national accounts, personal income generally excludes capital gains, but it includes dividends and interest, so it measures income from current activity.
Why is personal income revised?
Initial estimates are based on partial data, and statisticians update them as fuller tax and survey information arrives.
How is personal income used?
Policymakers, businesses and lenders watch it as a gauge of household spending power and as an input to forecasts of consumption and growth. Trends over several months are more reliable than any single reading. A rise driven by wages tells a very different story from one driven by one-off government payments, so check the components.
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