Problem solved in full
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Average raise for twelve people on 45,000 getting 6% and forty-eight on 72,000 7 steps
Twelve people on 45,000 get a 6% raise. Forty-eight on 72,000 get 2%. What was the average raise? There are two defensible answers and one wrong one, and the wrong one is the one that usually gets quoted.
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The tempting move is to average the two rates. It gives a department of twelve the same say as a department of forty-eight, which is the error the tool above exists to show โ but write it down anyway, because 4% is the figure that ends up in the announcement.
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Weight by headcount instead and each person counts once. This is the honest answer to "what did the average employee get", and it is already more than a point below the number in the announcement.
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Money, though, is not paid per head. The second department is four times the size and each of its people earns more, so it holds 86% of the payroll. Work out what each group actually costs before the raise.
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Weight by payroll and you get the number the budget feels โ the percentage the wage bill actually grew by. It is lower again, because the larger raise landed on the smaller pot.
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Both answers are correct. They answer different questions, and which one you need depends on whether you are counting people or money. The cash is the same either way, and it does not care which average anyone quotes.
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Now the part this tool cannot show you. Every weighted average above assumes the same people are there before and after. Take twenty employees, ten on 30,000 and ten on 60,000 โ a mean of 45,000.
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Lay off the ten lowest paid, and cut everyone who remains by 10%. The mean is now 54,000. It rose by a fifth while every single person still employed lost a tenth, and ten more lost everything. No weighting error was made anywhere; the set changed underneath the average. That is why "average wage rose" has to be read alongside who was still being counted.
Answer
2.80% weighted by headcount, 2.54% weighted by payroll, and about 101,500 a year in cash. The 4% is the one number that is simply wrong, and it is the one that gets announced.
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Learning path
One number for many: summary statistics
References (2)
- The weighted mean, the balance-point property, and why averaging averages misleads Freedman, D., Pisani, R. and Purves, R. (2007). Statistics (4th ed.). W. W. Norton โ Part II, on averages and the pitfalls of pooling groups of unequal size.
- The reversal this tool deliberately does NOT claim Simpson, E. H. (1951). The Interpretation of Interaction in Contingency Tables. Journal of the Royal Statistical Society: Series B, 13(2), 238โ241.