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
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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