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Business Commentary Most Canadian households better off financially than American counterparts: income comparison

Michael Wolfson, PhD, is a former assistant chief statistician at Statistics Canada, and currently is a member of the Centre for Health Law, Policy and Ethics at the University of Ottawa.

When comparing ourselves to Americans, Canadians have more reason to be proud than usually thought.

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 had about one-20th the number of gun homicides per 100,000 people, and that we produced about 30 times as much maple syrup per capita – all to the good.

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But when it comes to the overall economy, the Economist pointed to a substantial decrease in Canada’s labour productivity in comparison with the U.S. over the past 30 years.

Still, the most novel and least-appreciated statistic is that the median Canadian household income is actually higher than in the U.S.

A recently released study by the Canadian Centre for the Study of Living Standards carefully examined household income data 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. 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 its income, with households at the average income being at eye level. (This parade metaphor was first published by Jan Pen, an economist, as a “parade of dwarfs and a few giants” in the 1960s.)

The parade starts with the households having the lowest incomes. At the six-minute mark (the first 10 per cent), these households are so short they barely come up to our knees. More importantly, on the Canadian side, 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, the 30-minute mark, the Canadian households are taller than those in the U.S.

It is only 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 passing 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.

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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 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 1 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 comparing household incomes between the U.S. and Canada is the conversion factor. While the exchange rate was around 75 US cents in 2016, the CSLS used a much better basis for converting between American- 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-U.S. PPP produced by Statistics Canada pegs this factor at 84.1 US cents for one Canadian dollar.

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.

More generally, this comparative description of incomes in Canada and the U.S. highlights the unfortunate preoccupation of policy-makers and the media with the “big” economic numbers, GDP and GDP per capita. About a decade ago, then-French president Nicolas Sarkozy convened a blue-ribbon panel of economists to review the ubiquitous use of these figures especially in forming league tables comparing various countries’ economic performance. In its final report, the commission found that these broad economic aggregates did not reflect the lived experiences of their citizens, and instead recommended that the focus should shift to median family or household income and the distribution of income.

Unfortunately, in the decade since, little has changed. The statistical data and methods needed have been known for decades. It is long past time for attention to shift to more relevant measures of economic performance. And when we do, a majority of Canadians are actually better off than their counterparts in the U.S.

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