Blog

The highs and lows of how the word ‘average’ is used

We hear a lot about the ‘average’ person, family or household – and will hear a lot more as and when the UK next has a general election – but it is always worth considering just what people mean by the word

12/09/2019

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

“The average Briton” spends three hours a week on housework, watches five hours of video-related content a day and will spend seven and a half years of their life feeling tired – or so at least we learn from three ‘silly season’ news items selected at random from the past month.

And, as and when the UK sees another general election, no doubt we will discover a whole lot more about this mythical beast from campaigning politicians.

For of course “the average Briton” does not exist except in the minds of statisticians – or, perhaps more fairly, in other people’s interpretations of statisticians’ work.

As we have detailed previously, here on The Value Perspective, ‘average’ is a simple word that masks a significant degree of complexity, ‘time’ and ‘ensemble’ averages are very different things and the average of 10 and 50 is by no means necessarily 30.

In a similar vein, we would like to highlight a neat mental image of how the world of averages is a good deal more intricate than you might think if your only sources were journalists looking to fill space and politicians hoping to win votes.

Appearing in a 1971 book by Dutch economist Jan Pen, which bears the not-entirely-promising title Income Distribution, it has come to be known as ‘Pen’s Parade’ or ‘The Income Parade’.

The Income Parade

To add a degree of tangibility to the idea of how income can be distributed throughout an entire population, Pen invited his readers to imagine everybody in the UK paraded past them over the course of exactly one hour, grouped in order of their income.

Those earning nothing – or indeed a negative amount – would be right at the front, while bringing up the rear would be the country’s very highest earner.

Most importantly, Pen stated, each person’s height would be in direct proportion to their income – in other words, using Office for National Statistics (ONS) figures, those earning the average UK income (£28,677 in 2018) would be of average height (let’s call it 5ft 6in, which is midway between the 5ft 9in average for UK men and 5ft 3in for women). Thus, those earning half that would be 2ft 9in tall, twice that 11ft tall and so on.

Take your lead from the papers or Parliament and what you might broadly expect to see is a parade of people who are all of a similar height – but in fact the picture would be a good deal stranger.

0 - 3 mins

For starters, for the first few minutes, you would not be able to see anyone at all as those with negative incomes – perhaps because they have large debts or run a loss-making business – pass by.

In effect, then, these people have a negative height and might be pictured upside down, walking on the other side of the ground.

Nor does it grow any less odd after that – the first people you will see walking above-ground are just a few millimetres tall before, over the next few minutes, the heights tick up to those at the lower end of what the ONS describes as ‘elementary’ jobs.

As the following interactive chart from the ONS shows, these are mainly unskilled manual and clerical workers – shelf-stackers, bar staff, shop assistants, to pick out a few at random – earning in the region of £15,000.

And there are a lot of them. Indeed, this is the part of the parade where things do drag a little as millions of people on similar sorts of salaries pass by.

 

 

This continues for a while because, as you can see from the chart, there are many people from other parts of the workforce – for example, administrative and secretarial, caring, leisure and other services, machine and plant workers, skilled trades and sales and customer service – earning less than two-thirds of the average UK salary.

So many people, in fact, that we have reached the half-hour mark – the halfway point of the parade.

30 mins 

By now, you might assume the people walking past you would be of average height but they are not even 5ft tall – and here we are talking, say, construction employees, industrial workers and trained office staff.

It actually takes 45 minutes before we come to people of average height – those bang on the average UK salary, such as a fair number of the ONS’s ‘associate professional and technical’ category.

And then, in the last six minutes, it all reverts to the bizarre.

54 mins

As we head into the top 10% of the UK’s earners, things start accelerating very quickly as the upper reaches of the ONS’s ‘professional’ and ‘managers, directors and senior officials’ categories speed by.

These are the doctors and lawyers (and MPs), the IT, marketing and sales directors and then the chief executives, who by now are more than 20ft tall.

To emphasise our initial point, however, that is only on average and some are earning considerably more than the ONS’s median CEO figure of £97,083.

59 mins 56 seconds

Indeed, in the last few seconds of our parade, all you would really gain is an impression of some giant shoes as a few people hundreds of feet tall – those whose dividends put them at the very top of the Sunday Times Rich List, say – sped by in a blur.

You probably noticed we suddenly became marginally more technical in that last paragraph, using the word ‘median’ (the middle point of a set of numbers) rather than ‘mean’(the sum of all the numbers in a set divided by the amount of numbers in that set), which is what most people have in mind when they use the word ‘average’.

Completing the trio is ‘mode’ – the value in a set of numbers that occurs most often.

That in itself gives a sense of the complex nature of averages that is rarely acknowledged in a newspaper article or political speech – and yet it is so important to understand exactly what you are talking about.

Shop manager/crane operator matrimony

As a final illustration of this, take the example of a shop manager who is married to a crane operator – or as the ONS would have it, a ‘manager in retail or wholesale’ and a ‘mobile machine operator’.

These are the two occupations we could find that are closest to the average UK salary in 2018 of £28,677 and yet, in combination, their £57,000-odd elevates them into the top 25% of all households in the country – and well above the mean £37,168, according to the ONS.

So the next time an MP (salary £79,468) suggests we are all in this together or something similar, it may – on average – be best to take that with a pinch of salt.

Author

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

Important Information:

The views and opinions displayed are those of Ian Kelly, Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans and Simon Adler, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated. They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.

This article is intended to be for information purposes only and it is not intended as promotional material in any respect. Reliance should not be placed on the views and information on the website when taking individual investment and/or strategic decisions. Nothing in this article should be construed as advice. The sectors/securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy/sell.

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.