The poor, the rich and the ultra-rich
Although I am not an economist, economics is a subject I enjoy a lot because it simultaneously describes the situation of people around the world and lends itself to very interesting analyzes due to its purely quantitative nature. Consequently, this would not be the first time that I share data, analysis or economic news, but this time I want to take the opportunity to clear up a confusion in which I see that many people fall: the averages. When ‘average wages’ are mentioned in economic terms, the word average does NOT refer to ‘the one in the middle’.
If you recall from your high school statistics course, the median is the one that measures ‘the middle one’, and the mean (or the average) is calculated with an arithmetic process that describes ‘something’ of the distribution of the data. When the data is balanced, the mean and median tend to be close or very similar values, but when the data is unbalanced, they measure completely different things.
So when you read “the average monthly salary in Mexico is $7,128 MXN (375 USD based on 2019 rates)” surely many will think “Oh wow, half of the population living on less than 375 USD a month is really worrisome”, and it would indirectly mean that you also believe “Oh but at least we are not that bad, more than half of the population earns more than 373 USD, and I believe that should suffice to survive. ” It could also mean that if you are working in Mexico, earning something around 1040 USD, you might think “Oh wow, 1040 USD is not that far from 375 USD, I am earning much less than I deserve, surely I’m not even in the 25% richest because I know many people who earn way more.”
But the reality is that we are much worse off than the average misinterpreted as “the middle” may suggest. As you can see from this other graph, although the quarterly average income per home is $46,521 MXN, only about 20–30% of the data in the graph is above that value. So as you may have already grasped, the real interpretation is “Oh wow, over 70–80% of the population living on less than 375 USD a month is really worrisome, only about 20% of the population earns more than 375 USD a month , and by making 1040 USD a month I’m already part of the 6.3% richest of the country”. In fact, if you were born between 1980 and 1995 and make over 690 USD a month, you are luckier than 96% of your Mexican contemporaries.
For every additional 50 USD that someone earns above those amounts that I mentioned, their level of relative wealth, in relation to the level of the population, increases tremendously even if it does not seem like so. To put it into context, let’s review the cost of a car…
Take the 175,000 MXN Fiat Mobi. If we divide 175/7,128, it gives us 24.55, which means that for ~80% of the population who earn less than 375 USD a month, buying a new car means saving 100% of their income for 2 years or more, according to how much they are making. And considering that expenses are also a thing, it becomes an impossibility. So it is time to accept it: If you are someone who has the possibility to buy a car, you are rich, you are not an ‘average Mexican’.
And why is the average salary so decieving?
Partially due to the fact that we do not have an accurate record of all the data and we only know the tax data of about 47% of the population, but mainly because the average is highly dependent on the balance of the distribution being studied. The mean is very useful when analyzing a population with a normal distribution, but in other distributions it loses much of its usefulness.
To give an example, let’s assume 10 people who earn the following: 0,5,6,7,8,9,10,15,18 and 100.
If we average it all out, it gives us 17.8, which is way above what most show (only 2 out of 10, or 20%, earn more than that), because that 100 raises the average bya lot. And at this point some could be thinking, “Ah yes, but there is also a 0 there that is pulling the average down, so the effects are countered”, and that’s fine, it would be valid to think that with balanced distributions. To see what happens then, let us average just the middle 8 to remove extremes. Doing this gives us an average of 9.75, which seems to describe the population way better.
Now, just to figure whether the low-end or the high-end impacts more noticeably, lets compute the mean of the 9 lowest and the 9 highest values.
• The first 9 average 8.67, which continues to reflect the population quite well (I would argue that even better than the 9.75).
• The last 9 average 19.78, which literally only the one who makes 100 surpasses.
And this is because the distribution of wealth (actually many distributions involving populations and money) behaves in a normal logarithmic fashion (also known as lognorm), which means that a lot of people earn very little, but it is a “little” limited by 0, and then very few people make a lot, but it is a limitless “a lot”.
That 1% or 0.1% of people who earn millions of pesos a month (Made up percentage, I don’t know the proportion of people in the “ultra-rich” category, but I’m not trying to state facts here) impact naive statistics such as the mean much more than the poorest 10% who make less than $3,000 MXN a month (also, made up percentage). And if you think I’m exaggerating about the impact that the “ultra-rich” have on these statistics, I invite you to check out the following link that makes scaled comparisons of Jeff Bezos’s wealth (owner of Amazon), the 400 richest people in the United States and the common American citizen. For those of you who won’t take the time to check it out, I’ll summarize it for you in this one sentence: the richest 400 Americans (or the richest 0.000121% of the country’s population) have more combined wealth than the poorest 197 million Americans (Or, the poorest 60% of the country’s population). That is how ridiculous the reality is under the economic system we follow.
As a final exercise to try to understand just how rich the ultra-rich are, consider the following.
- America was discovered on 1492
- We just finshed the year 2019
- The average mexican salary is 7,128 MXN
- Exchange rates on 2019 were 19.37 MXN = 1 USD
If someone had had been earning 100,000 MXN (5,160 USD) a month since the discovery of America, by 2019 he would only have made 993 million USD, still 7 millions short of a billion which is defined as 1,000 million USD.
And that is 1 billion. Jeff Bezos has 131.
Rethink your privileges, and if in these moments of world crisis you are in a position which allows you to offer support to those who need it right now, I invite you to do so. It is not charity, it is solidarity and responsibility.