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The Daily. Friday, July 28, 2000
Income distribution patterns in Canada and the United States have diverged during the past 10 years despite free trade and increased economic integration between the two nations, according to a new study.
Average real incomes are higher and have been growing considerably faster in the United States. At the same time, Canada has not seen the substantial increase in income inequality that has occurred in the United States.
Inequality (the gap between rich and poor) and polarization (decline in the middle class) of family disposable incomes in Canada has remained roughly stable since the mid 1970s, while it has increased in the United States, more so since the mid 1980s.
The income gap between Canadian and American families has widened at the top of the income spectrum. At the bottom of the income spectrum, Canadian families are better off in terms of purchasing power than are their American counterparts.
The study, «Income inequality in North America: Does the 49th parallel still matter?,» explores patterns of change between 1974 and 1997 in average earnings and income distribution in Canada and the United States. It also investigated these patterns on the basis of broad geographic regions within both countries.
The study rejected a theory that increasing economic integration has lead to greater similarity in patterns of income distribution in the two countries. Rather, the results suggested a widespread difference in overall income distribution in both Canada and the United States. If anything, the differences appeared to be widening, at least up to 1997.
While Canadian and American societies are similar in many respects, their levels and trends in income inequality have been quite different during the past two decades.
Real incomes are higher and have been growing faster in the United States on average. However, income inequality is higher in the United States, and it has been rising more rapidly.
In terms of comparative economic well-being, Canadian families in the bottom 25% of the income distribution were better off in absolute terms in 1997 than were their counterparts in the United States.
However, in the top one-fifth of the income distribution, American families had disposable incomes more than 20% higher than their Canadian counterparts. In the top one-tenth of the income distribution, disposable incomes among American families were about 25% higher.
In 1997, disposable incomes for American families in the top one-fifth of the income distribution averaged $61,400 compared with $50,800 for Canadian families.
Government transfer programs have had a substantially equalizing impact on family income distributions on both sides of the border. In fact, between 1974 and 1985, the American transfer system appeared more redistributive than Canada's. However, between 1985 and 1997, government transfer programs in Canada generally had larger impacts.
Individual income and payroll taxes have also had an equalizing impact on the distribution of family income on both sides of the border. This effect was somewhat larger in Canada than in the United States. However, in both countries, income taxes had considerably weaker equalizing impacts than did income transfers.
In 1997, American workers averaged about $36,500 in earnings (expressed in 1995 Canadian dollars using purchasing power parities), 29.2% more than the Canadian average of $28,300. These workers included both men and women, employed both full-time and part-time, and employees as well as the self-employed.
These 1997 averages followed increases of 14.6% in the United States between 1985 and 1997 and 5.9% in Canada.
The differences in earnings between the two countries was largest for workers at the top of the earnings distribution. The difference at the median - the middle point at which half the population has higher earnings and half lower - was smaller (13.6%). The median earnings of American workers were $27,500 in 1997, compared with $24,200 in Canada.
Also, the rate of increase in median earnings was much closer than those for mean earnings. In the United States, median earnings increased 8.7% from 1985 to 1997, and in Canada 7.7%.
Between 1974 and 1985, earnings inequality and polarization increased in both countries. These changes were more pronounced in Canada than in the United States.
However, between 1985 and 1997, these trends were completely reversed in Canada, where the earnings gap narrowed and polarization declined. In the United States, earnings inequality continued to increase, but polarization declined, signaling a reversal of the "disappearing middle-class jobs" phenomenon first noted over a decade ago.
The feature article «Income inequality in North America: Does the 49th parallel still matter?» is now available as a PDF file on Statistics Canada's Web site (www.statcan.ca). It will also be available in the August 2000 issue of Canadian Economic Observer.
For more information, or to enquire about the concepts, methods or data quality of this release, contact Michael Wolfson, (613-951-8216), Analysis and Development Group.