US v Canada

Doug Henwood dhenwood at panix.com
Fri Mar 26 08:02:35 PST 1999


"New Views on Inequality Trends in Canada and the United States"

BY: MICHAEL C. WOLFSON

Statistics Canada

Analytical Studies Branch

BRIAN B. MURPHY

Statistics Canada

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Paper ID: Statistics Canada Working Paper No. 124

Date: July 1998

Contact: Valerie Thibault

Email: Mailto:thibaul at statcan.ca

Postal: Statistics Canada

Analytical Studies Branch

120 Parkdale Avenue

24th Floor, R. H. Coats Building

Ottawa K1A 0T6, Ontario CANADA

Phone: (613)951-1804

Fax: (613)951-5403

Paper Requests:

Contact StatCan, Publications Review Committee, Analytical

Studies Branch, 24th Floor, R.H. Coats Building, 120 Parkdale

Ave., Tunney's Pasture, Ottawa, Ontario K1A 0T6 Canada. Phone:

(613)951-6325 Fax:(613)951-5403 $5 per publication.

ABSTRACT:

Analysis reveals that, from 1974 to 1995, a large portion of

Canadian families had absolutely higher purchasing power than

their U.S. counterparts; in both countries, individual earnings

polarization fell over the past decade.

Ce qui est simple est toujours faux,

ce qui ne l'est pas est inutilisable.

[Whatever is simple is always wrong,

whatever is not is unusable]

- Paul Valery

Conventional wisdom has it that U.S. society is both richer

and more unequal than Canadian society and that the two have

become more unequal in recent decades. Moreover, increasing

globalization has raised concerns about a "race to the

bottom"--that global competition in the production of traded

goods and services is forcing countries with more generous

social transfers or more egalitarian wage structures to abandon

these mechanisms or risk losing out. This article addresses such

conventional wisdom by focusing on a comparison of income

inequality in Canada and the United States over the past two

decades. Given the similarity of the two countries' societies,

as well as their close and growing economic integration, with

the highest level of bilateral trade of any two countries in the

world, this comparison provides an opportunity to assess the

possible impact of globalization on the convergence of income

inequality.

The distribution of income in any society is complex and

multifaceted. The analysis that follows endeavors to give an

overall picture by presenting data from several perspectives. In

particular, it starts with data on the labor market from an

individual viewpoint and then moves to the broader perspective

of families and their disposable incomes. A number of intriguing

results emerge from the analysis. One is that, even though the

U.S. economy appears better off in terms of total output per

capita, families (including unattached individuals) living in

the United States are not necessarily better off, in terms of

disposable income, than their Canadian counterparts. Indeed,

roughly half of Canadian families had disposable incomes in 1995

that gave them higher purchasing power than otherwise comparable

U.S. families. The reason is that the very rich in the United

States pull up the average income much more than in Canada,

while those at the bottom of the U.S. income spectrum have less

purchasing power than those at the bottom in Canada.

One major factor in these comparisons is the labor market. On

average, U.S. workers make more money than their Canadian

counterparts; however, the numbers of individuals working for

pay in the two countries do not accord with the usual

impressions given by comparing official unemployment rates.

Also, while trends in the distribution of labor income were

quite different in the United States and Canada in the decade

from the mid-1970s to the mid-1980s, the following decade, up to

1995, saw much more similar patterns of change in the two

countries.

In terms of labor market inequality, the results of the

analysis accord with the conventional wisdom, namely, that

inequality has been increasing. However, polarization is an

aspect of income distributions (as is the incidence of poverty)

that is distinct from inequality, and polarization itself does

not always increase when inequality increases. Perhaps

surprisingly, this was in fact the case for the U.S. earnings

distribution between 1985 and 1995: the proportion of workers

with earnings close to the median rose over the period, as it

did in Canada. In other words, both countries experienced the

opposite of a "disappearing middle class" in their earnings

distributions.

What matters more directly to families than individual labor

income inequality or polarization is their disposable

income--labor income, plus investment returns, plus government

transfers, less income taxes and payroll taxes. Family

disposable income therefore depends not only on the labor market

in each country, but also on national, state, provincial and

local government social programs and taxation policies (as well

as the correlations among husbands', wives', and other family

members' incomes). From this perspective, Canada is clearly

"kinder and gentler": both inequality and polarization are

considerably lower, and incomes at the bottom of the spectrum

are higher than in the United States. Moreover, between 1985 and

1995, both inequality and polarization of family disposable

income fell in Canada, while both rose in the United States.

One trend that was similar concerned the low-income

population, which, defined simply as those families with half

the median family income or less, fell in both countries. The

U.S. incidence of low income was about 50 percent higher than

Canada's, but contrary to trends based on the official

(absolute) U.S. poverty line, low income defined in this

relative manner fell in the United States from 1985 to 1995.

JEL Classification: J31



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