The latest figures for Australian household incomes and wealth released last week showed that income inequality has risen in the past two years. The average annual income of the richest 20% rose by 7%, while median households saw their income rise by just 1.3% in the same period.

Politicians love to justify economic policy by referring to “middle Australians” or the average household. So Australia’s median income is important.

But deciding who is wealthy and who’s an average battler generally comes down to whether the politicians are being generous or making cuts. For example Tony Abbott, when defending his childcare subsidy earlier this year, suggested that “in a city like Sydney, a $185,000 family income is not especially high”.

While there is some good data on household incomes by organisations such as the National Centre for Social and Economic Modelling, every two years the Australian Bureau of Statistics releases its survey of Household Income and Wealth.

The latest release shows that the median gross household income in 2013-14 was $80,704, and the average of all households was $107,276:

As you might imagine, these figures are a bit misleading.

Yes, if you live in a household that brings in more than $80,704 yours is in the richest 50% of all households, but such figures don’t account for differences in household size. The gross income figures effectively treats a household with a family of five the same as that of a single person.

So saying you live in a household that brings in $80,000 doesn’t tell us much. If you are living alone, you’re clearly doing a lot better than another household on the same income that has two adults and three kids.

This is why the ABS uses “equivalised” household incomes. This measure allows us to compare households like for like – by firstly looking at disposable income, which gives a better indication of the income a household has available to meet its needs, and then by allowing for differences of household sizes.

The formula adds 50% to an income for each adult and 30% for each child under 15. So, for example a single person earning $1,000 a week would be on the same equivalised income as a household with a single parent with one child who earned $1,300.

Using this measure the median annual disposable income for a single person is $43,836 and for a family of two adults and two children it is $92,056:

It’s a bit hard to work out what you’d need to earn before tax to hit that median, assuming your income comes via work and not government benefits, which is rarely the case. But for a single person to take home $43,836 after income tax and the Medicare levy has been paid, they’d need to be on about $53,800.

For a family of two it is even harder to estimate, given we need to know the split of incomes earned. But assuming a 70/30 split of income (ie one partner earns 70% of the household’s income), one partner would need a job paying $85,900, while the other earned $30,000, for a total pre-tax income of $115,900.

Interestingly, the amount at which a household with two kids under 12 stops receiving any Family Tax Benefit A is $109,427 – thus a level below the median household income.

Using the same split, households earning $185,000, far from being “not especially high” would be in the top 25% of all households.

The chart below lets you arrange the figures according to size of household:

Not surprisingly, since the GFC the growth of income for all households has slowed compared with during the boom years of 2002-2008.

During the GFC years from 2009 to 2012 the wealthiest took the biggest hit to income – due to their greater reliance on income from sources such as share dividends and also because higher-paying jobs are more subject to fluctuations than are those mandated by awards and minimum wages.

But from 2011-12 to 2013-14 the biggest growth in incomes was for the wealthiest. Those in the top 20% saw their household income rise on average by 7% over those two years (3.5% annually) compared with a mere 1.3% growth for median income households in that period:

This above-average growth for the richest 20% has effectively undone the reductions in income inequality that were caused by the GFC:

The boom years saw Australia’s Gini coefficient (which measures inequality) rise from 0.306 in 2003-04 to 0.336 in 2007-08. The fall in highest incomes saw this drop to 0.32 in 2011-12. But now it is back up to 0.333.

Effectively, Australia is now as unequal as it ever has been. The drive in inequality is not so much the rich getting richer while the poor get poorer, as it is the rich getting richer while everyone else stagnates.

Low wages growth over the past two years has seen median incomes barely increase.

Increases in the minimum wage and the indexation of various pensions mean lower income households have seen their incomes grow by a similar, if pitiable, amount as median households since the GFC.

But the picture of inequality over the past 20 years is one of Australia’s welfare system keeping the incomes of the poorest households largely in line with those of median income households.

In 1994-95, median households earned around 2.23 times the income of the poorest 20% of households. In 2013-14 it was 2.25 times – barely any change at all.

By comparison, in 1994-95 the average income of richest 20% was 2.13 times that of median households; now it is 2.42 times:

The debate of inequality generally rests on whether it is OK for inequality to increase so long as everyone’s incomes rise. The “rising tide lifts all boats” argument worked well during the boom, but not any more.