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.
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May 31, 2002
Sergei S Soares 
Open Access