American households not only live with higher income inequality than in Canada but more than half are worse off in terms of purchasing power
By Michael Wolfson
Centre for Health Law, Policy and Ethics
University of Ottawa
Regardless of whether America is great, or about to be great again, a new analysis shows that Canadians outrank Americans on household income.
The Economist magazine recently devoted a long section to a profile of Canada with frequent comparisons to the United States. Among the statistics highlighted were that Canadians’ life expectancy was three years greater than in the U.S., that Canada has about one-20th the number of gun homicides per 100,000 people, and that Canada produces about 30 times as much maple syrup per capita.
When it comes to the overall economy, the Economist pointed to a substantial decrease in Canada’s labour productivity in comparison to the U.S. over the past 30 years. But, importantly, the median Canadian household income is actually higher than in the U.S.
The Economist briefly quoted this statistic, which is based on a recent study by the Canadian Centre for the Study of Living Standards. It carefully examined household income distributions from both sides of the border – using detailed survey data for 2016 from Statistics Canada and the U.S. Census Bureau. The analysis ranked households by their total income, and even though the U.S. has about 10 times the population, the lineups were scaled to show comparable percentages of households.
We can view these lineups as two parallel parades (a metaphor popularized by economist Jan Pen in the 1960s). On one side of the parade stand we see the Canadian households, while on the other, U.S. households are ready to start passing by. These two parades have been set up to take exactly one hour for each to pass by. Further, let’s imagine that the height of each household is exactly proportional to their income, with households at the average income being at eye level.
The parade starts with the households having the lowest incomes. At the six-minute mark into the parade (the first 10 per cent), these households are so short they would barely come up to our knees. On the Canadian side of the parade stand, these households are about 25 per cent taller than the U.S. households.
At the 15-minute mark, the Canadian households are up to our waists, and are about 10 per cent taller than their U.S. counterparts. Even at the halfway point, in this parallel parade, the 30-minute mark, the Canadian households are taller than those in the U.S. It is only a few minutes later, at the 56th percentile of the household populations, that the U.S. households are just as tall as their Canadian counterparts.
In other words, when we examine household income, the money people have in their pockets, rather than gross domestic product (GDP) which includes all sorts of other things, the median Canadian household is better off than their U.S. counterpart.
As the parade continues, though, the U.S. households become increasingly taller than the Canadian households as they both pass by the parade stand at the same time. Households at eye-level pass by shortly before the 40-minute mark. These households have average incomes and, because the distributions on both sides of the border are skewed toward higher incomes, the average income is higher than the median, the income we saw at the halfway mark.
By the 54-minute mark, when 90 per cent of the households have passed by, we are looking at U.S. households that are three times as tall as those we saw at the 30-minute mark, while Canadian households at this point are about two and a quarter times as tall. And in the last 40 seconds, as those in the top one per cent are passing by, they are about 15 times as tall as those at the halfway mark on the U.S. side of the parade, while on the Canadian side these top 1-per-cent households are about seven times as tall.
A key factor in this comparison of household incomes between the U.S. and Canada is the conversion factor. While the exchange rate was around 75 cents in 2016, the CSLS used a much better basis for converting between U.S. and Canadian-dollar incomes, purchasing power parity (PPP). This factor is essentially a price index, based on direct comparisons of the prices of hundreds of different commodities in the two countries, from cars to computers. The bilateral Canada-US PPP produced by Statistics Canada pegged this factor at 84.1 US cents for one Canadian dollar in 2016.
So not only do households in the U.S. live with much higher income inequality than in Canada, more than half are actually worse off in terms of everyday purchasing power.
— Michael Wolfson, PhD, is a former assistant chief statistician at Statistics Canada, and currently a member of the Centre for Health Law, Policy and Ethics at the University of Ottawa.