The Balance Sheets of Low-Income Households: What We Know about Their Assets and Liabilities. Strengths and Weaknesses of Measures


That income and wealth are tightly concentrated in a relatively few, high-income households argues for the use of medians over means, as medians are much less sensitive to outliers (Aizcorbe et al. 2003). Still, medians by themselves only reveal conditions for typical households and, for our purposes, would miss shining a spotlight on the possible distress felt by the bottom 50 percent. That is why it is important to combine medians (as well as means) with income classifiers like quintiles and deciles.

A related point is that means and medians must also be weighed against holding rates (the likelihood that a household would hold a particular asset or debt). Some calculations of means and medians include zeros  that is, households that do not hold an asset or debt  while other calculations do not. If means and medians exclude zeros, then a statement that median business equity is $200,000 refers only to the sample of households that have business equity  if the vast majority of households, who do not hold any business equity, were included, the $200,000 figure would be much lower.

The gini coefficient is a relative measure of inequality. To give an extreme example, a gini coefficient calculated for the wealth holdings of the top 0.1 percent wealthiest individuals would show a lot of inequality as there are households with $1 million mixed in with households with $50 million or $100 million, even though none of these households are poor. Similarly, a gini coefficient calculated for a sample of households on welfare for some portion of the year where those earning $0 are mixed in with those earning $5,000 to $7,000, would indicate tremendous inequality, even though all the households are below the poverty level. Caner and Wolff (2004), as mentioned, present asset poverty measures, instead. Unlike gini coefficients, asset poverty is an absolute measure.

With regard to debt, higher debt-to-asset ratios may be more common for younger households that have just begun acquiring assets and have not had the time to build up sufficient equity. The clearest example of this would be a household that has just purchased a $150,000 home with a $5,000 down payment. While their $5,000 down payment represents their equity or asset value, they have $145,000 remaining in their mortgage, or debt. The debt service ratio may be more indicative of a households indebtedness. Also, the type of debt is important  debt that directly accompanies an asset (e.g., mortgage debt) is considered secure and is better to have than unsecured debt that is mainly used to finance current consumption rather than current savings (e.g., consumer credit card debt).

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