Abstract
We use the Levy Institute Measure of Economic Well-Being (LIMEW) to compare living standards and inequality in Canada and the United States. LIMEW includes non-cash government transfers, public consumption, annuitized wealth, and household production and nets out all personal taxes. We compare our results to the standard US Census measure, gross money income (MI). We expected a smaller inter-country gap in median LIMEW than median MI and relatively lower LIMEW inequality in Canada because of the more extensive Canadian welfare state. Instead, we found that the measured gap in the level and inequality of economic well-being was higher based on LIMEW than MI.
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Notes
The Canadian standard is disposable personal income (DPI), defined as gross money income minus personal current taxes. Comparisons of LIMEW with DPI yield results very similar to those between MI and LIMEW and, as a result, are not shown here.
The construction of DPI, on the other hand, requires imputations of several tax items.
See, for example, US Congressional Budget Office [2011]. This measure includes a valuation of government transfers in-kind such as Food Stamps, Medicare, and Medicaid and nets out personal taxes. Unfortunately, there is no comparable series available for Canada.
In their measure, they add to CPS money income a valuation of in-kind government benefits such as food stamps, the insurance value of health insurance, and capital gains on both investments and housing and net out personal income and payroll taxes. They found that over the years 1989–2007, median comprehensive income grew somewhat faster than CPS income and overall inequality in comprehensive income declined, whereas the inequality in CPS income increased.
See, for example, Wolff and Zacharias [2007a] for more details. Historical estimates of LIMEW for the United States and detailed discussion of the empirical methodology can be found in Wolff et al. [2012].
Also see the edited volume by Green and Kesselman [2006] for more analysis of inequality trends in Canada.
Also see OECD (2011) for an extensive international comparison of inequality among OECD countries, including Canada and the United States. Particular attention is focused in this book on how tax and benefit systems changed over time in the ways they redistribute income in these countries.
As a result, the estimates presented here for the US LIMEW differ from our earlier estimates [e.g., in Wolff et al. 2012].
This method gives a better indication of resource availability on a sustainable basis over the expected lifetime than the standard bond-coupon method. The latter simply applies a uniform interest rate to the value of non-home wealth. It thereby assumes away differences in overall rates of return for individual households ascribable to differences in household portfolios. It also assumes that the amount of wealth remains unchanged over the expected (conditional) lifetime of the wealth holder.
The rate of return we use is actually an implicit rate of return derived as a weighted average of asset-specific and historical real total returns (the sum of the change in capital value and income from the asset, adjusted for inflation) where the weights are the proportions of the different assets in a household’s total wealth.
It should be noted that here, as in the case of imputed rent, as well as in other imputations in the construction of LIMEW, incorporating additional income sources beyond the conventional ones requires many additional assumptions and these can be controversial (see Atkinson and Marlier 2010 for a discussion of these issues).
In the case of medical benefits, the relevant cost is the “insurance value” differentiated by risk classes. An alternative approach is the “fungible value” method used by the US Census Bureau to value medical benefits in its extended income measures. The fungible-value method is based on the argument that the income value for the recipient of a given noncash transfer is, on average, less than the actual cost incurred by the government in providing that benefit [see, e.g., Canberra Group 2001, p. 24, 65]. We elected not to use the fungible-value method because, unlike the social-accounting method, this method would not yield the actual total government expenditure when aggregated across recipients.
Our main findings were qualitatively similar when we considered our estimates in terms of household equivalent LIMEW or income. It should be noted that the use of individual equivalent income (or LIMEW) is based on the assumption that each individual in the household has access to the amount of resources indicated by their household income (or LIMEW). The use of the household equivalent basis does not directly indicate the resources available to the individual in the household but only the amount available to the household as a whole.
The real hourly wage of domestic workers fell in Canada, from US$9.20 to $8.80, while in the United States it rose from $7.40 to 7.70 (all amounts are in PPP-adjusted 2000 international dollars).
Table 7 also shows Gini coefficients for household equivalent LIMEW and MI. The results are very similar.
As pointed out by an anonymous referee, these and other estimates are reported in the paper are subject to both sampling and nonsampling errors. The same referee also suggests that the latter type of errors may be substantial given the imputations made in constructing the LIMEW. It appears to us that the extent of nonsampling errors is hard to quantify in the sort of analysis that is carried out in the paper. On the other hand, estimates of sampling variability could be constructed using available techniques, for example, the jackknife method. However, it is our belief that taking sampling variability into account will not qualitatively affect the major conclusions of the paper.
Our chosen technique is often referred to as a “natural decomposition” because it derives directly from the formula for the Gini. Alternative approaches are also available in the literature, particularly following the axiomatic approach developed by Shorrocks [1982]. For a review, see Lerman [1999].
The contribution of an income source j, denoted as k j can be expressed as: k j =r j g j s j , where r j =cov(y j ,F)/cov(y j ,F j ); y j is the amount of income from the source; F j and F are the cumulative distributions of the income source and total income; g j is the Gini coefficient of the income source; and, s j is the share of the income source in total income [Lerman and Yitzhaki 1985].
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Acknowledgements
The research reported here was conducted as part of the Levy Institute’s research project on international comparisons of economic well-being. Edward Wolff and Ajit Zacharias directed the project. We are grateful to the Alfred P. Sloan Foundation for their generous support. We are also grateful for the contributions of Benjamin Evans, Elspeth Hazell, and Alexander Murray toward developing the estimates for Canada.
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APPENDIX
APPENDIX
The table below shows the results from the decomposition of the Gini coefficient of LIMEW according to the equation described in the main text (see Footnote 18). In brief, the decomposition expresses the Gini coefficient of LIMEW, G, as: G=∑g k r k s k , where g k is the Gini coefficient, r k is the Gini correlation coefficient, and s k is the income share of income source k. The contribution of a particular component of LIMEW, such as income from non-home wealth, denoted c k is expressed as: c k =g k r k s k .
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Wolff, E., Zacharias, A., Masterson, T. et al. A Comparison of Inequality and Living Standards in Canada and the United States Using an Extended Income Measure. Eastern Econ J 42, 171–192 (2016). https://doi.org/10.1057/eej.2014.34
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DOI: https://doi.org/10.1057/eej.2014.34