New views on inequality trends in Canada and the United States

Monthly Labor Review

Volumn 121, Issue 4, 1998, Pages 3-19

  Wolfson, Michael C ^a   Murphy, Brian B ^a  

^a STATISTICS CANADA   (Canada)

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EID: 0002502092     PISSN: 00981818     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (29)

1. In this and the following section, all results are derived from special tabulations and analyses of detailed microdata from the Survey of Consumer Finance in Canada and the March supplement to the Current Population Survey (CPS) in the United States. (See appendix for details.)
2. The three years shown have been selected to span two decades, to end with the most recent data available, and to represent similar points in the business cycle. Data for additional years would be desirable, but, as will be seen, would greatly complicate the presentation. Moreover, based on other studies (see, for example, L. Karoly, "Changes in the Distribution of Individual Earnings in the United States: 1967-1986," Review of Economics and Statistics, February 1992, pp. 107-15; and two articles in the December 1997 issue of the Monthly Labor Review: Jared Berstein and Lawrence Mishel, "Has wage inequality stopped growing?" pp. 3-16; and Robert I. Lerman, "Reassessing trends in U.S. earnings inequality," pp. 17-25), as well as our examinations of detailed annual Canadian data, choosing other points in time would not change the general conclusions of this article.
3. The three years shown have been selected to span two decades, to end with the most recent data available, and to represent similar points in the business cycle. Data for additional years would be desirable, but, as will be seen, would greatly complicate the presentation. Moreover, based on other studies (see, for example, L. Karoly, "Changes in the Distribution of Individual Earnings in the United States: 1967-1986," Review of Economics and Statistics, February 1992, pp. 107-15; and two articles in the December 1997 issue of the Monthly Labor Review: Jared Berstein and Lawrence Mishel, "Has wage inequality stopped growing?" pp. 3-16; and Robert I. Lerman, "Reassessing trends in U.S. earnings inequality," pp. 17-25), as well as our examinations of detailed annual Canadian data, choosing other points in time would not change the general conclusions of this article.
4. The three years shown have been selected to span two decades, to end with the most recent data available, and to represent similar points in the business cycle. Data for additional years would be desirable, but, as will be seen, would greatly complicate the presentation. Moreover, based on other studies (see, for example, L. Karoly, "Changes in the Distribution of Individual Earnings in the United States: 1967-1986," Review of Economics and Statistics, February 1992, pp. 107-15; and two articles in the December 1997 issue of the Monthly Labor Review: Jared Berstein and Lawrence Mishel, "Has wage inequality stopped growing?" pp. 3-16; and Robert I. Lerman, "Reassessing trends in U.S. earnings inequality," pp. 17-25), as well as our examinations of detailed annual Canadian data, choosing other points in time would not change the general conclusions of this article.
5. The Canadian figures are expressed in constant dollars using the Consumer Price Index (CPI); for the United States, the official CPI is used for post-1982 data, while the "experimental" index based on current methodology is used for pre-1982 data. Amounts are rounded to reflect, generally, the maximum number of digits that are statistically significant, given sampling variability. Figures in the text may differ from those in the table due to rounding.
6. The $500 amount corresponds roughly to 2 weeks working full time at the minimum wage in Canada in 1995. U.S. minimum thresholds were based on the same (Canadian) $500 amount, converted to U.S. dollars using the 1995 Statistics Canada personal final expenditure purchasing power parities and then deflated using the U.S. CPI. (See table A3 in appendix.)
7. This relationship suggests a need for further exploration to account for the differential trends in these two approaches to measuring the extent of labor force participation.
8. See, for example, M. L. Blackburn and D. E. Bloom, "The Distribution of Family Income: Measuring and Explaining Changes in the 1980s for Canada and the United States," in D. Card and R. B. Freeman, eds., Small Differences That Matter: Labor Markets and Income Maintenance in Canada and the United States (Chicago and London, University of Chicago Press, 1993), pp. 233-65.
9. See, for instance, R. Morissette, J. Myles, and G. Picot, What Is Happening to Earnings Inequality in Canada? Analytical Studies Branch Research Paper Series, no. 60 (Ottawa, Ontario, Statistics Canada, 1994); S. J. Davis, "Cross-Country Patterns of Change in Relative Wages," in O. J. Blanchard and S. Fischer, eds., NBER Macroeconomics Annual (Cambridge, MA, MIT Press, 1992), pp. 239-92; L. Karoly, "Anatomy of the U.S. Income Distribution: Two Decades of Change," Oxford Review of Economic Policy, spring 1996, pp. 76-95; C. Juhn, K. M. Murphy, and B. Pierce, "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, June 1993, pp. 410-42; Bernstein and Mishel, "Has wage inequality stopped growing?" and Lerman, "Reassessing Trends."
10. See, for instance, R. Morissette, J. Myles, and G. Picot, What Is Happening to Earnings Inequality in Canada? Analytical Studies Branch Research Paper Series, no. 60 (Ottawa, Ontario, Statistics Canada, 1994); S. J. Davis, "Cross-Country Patterns of Change in Relative Wages," in O. J. Blanchard and S. Fischer, eds., NBER Macroeconomics Annual (Cambridge, MA, MIT Press, 1992), pp. 239-92; L. Karoly, "Anatomy of the U.S. Income Distribution: Two Decades of Change," Oxford Review of Economic Policy, spring 1996, pp. 76-95; C. Juhn, K. M. Murphy, and B. Pierce, "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, June 1993, pp. 410-42; Bernstein and Mishel, "Has wage inequality stopped growing?" and Lerman, "Reassessing Trends."
11. See, for instance, R. Morissette, J. Myles, and G. Picot, What Is Happening to Earnings Inequality in Canada? Analytical Studies Branch Research Paper Series, no. 60 (Ottawa, Ontario, Statistics Canada, 1994); S. J. Davis, "Cross-Country Patterns of Change in Relative Wages," in O. J. Blanchard and S. Fischer, eds., NBER Macroeconomics Annual (Cambridge, MA, MIT Press, 1992), pp. 239-92; L. Karoly, "Anatomy of the U.S. Income Distribution: Two Decades of Change," Oxford Review of Economic Policy, spring 1996, pp. 76-95; C. Juhn, K. M. Murphy, and B. Pierce, "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, June 1993, pp. 410-42; Bernstein and Mishel, "Has wage inequality stopped growing?" and Lerman, "Reassessing Trends."
12. See, for instance, R. Morissette, J. Myles, and G. Picot, What Is Happening to Earnings Inequality in Canada? Analytical Studies Branch Research Paper Series, no. 60 (Ottawa, Ontario, Statistics Canada, 1994); S. J. Davis, "Cross-Country Patterns of Change in Relative Wages," in O. J. Blanchard and S. Fischer, eds., NBER Macroeconomics Annual (Cambridge, MA, MIT Press, 1992), pp. 239-92; L. Karoly, "Anatomy of the U.S. Income Distribution: Two Decades of Change," Oxford Review of Economic Policy, spring 1996, pp. 76-95; C. Juhn, K. M. Murphy, and B. Pierce, "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, June 1993, pp. 410-42; Bernstein and Mishel, "Has wage inequality stopped growing?" and Lerman, "Reassessing Trends."
13. See, for instance, R. Morissette, J. Myles, and G. Picot, What Is Happening to Earnings Inequality in Canada? Analytical Studies Branch Research Paper Series, no. 60 (Ottawa, Ontario, Statistics Canada, 1994); S. J. Davis, "Cross-Country Patterns of Change in Relative Wages," in O. J. Blanchard and S. Fischer, eds., NBER Macroeconomics Annual (Cambridge, MA, MIT Press, 1992), pp. 239-92; L. Karoly, "Anatomy of the U.S. Income Distribution: Two Decades of Change," Oxford Review of Economic Policy, spring 1996, pp. 76-95; C. Juhn, K. M. Murphy, and B. Pierce, "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, June 1993, pp. 410-42; Bernstein and Mishel, "Has wage inequality stopped growing?" and Lerman, "Reassessing Trends."
14. See M. C. Wolfson, "Divergent Inequalities - Theory and Empirical Results," Review of Income and Wealth, December 1997, pp. 401-21.
15. On the basis of a study by Kovacevic and Binder, Wolfson has provided detailed estimates of statistical significance for income inequality and polarization measures, taking account of the complex clustered sample design of the underlying Survey of Consumer Finance, the source for the Canadian data used in this article. The underlying U.S. data come from surveys with similarly complex sample designs. Thus, while formal estimates of sampling variability have not been generated for the analysis that is presented, the conclusions are those which would be statistically significant if variances similar to the ones found in the earlier study had applied. (See Wolfson, "Divergent Inequalities"; and M. S. Kovacevic and D. A. Binder, "Variance Estimation for Measures of Income Inequality and Polarization - the Estimating Equations Approach," Journal of Official Statistics, March 1997, pp. 41-58.
16. These charts differ somewhat from the usual presentations, for example, by Karoly and by Juhn and colleagues. (See footnote 7.) First, the bottom and top 5 percent are not trimmed off. The top 5 percent of the population is usually omitted from analyses of U.S. earnings, due to the top coding of incomes on public-use data. This article, however, draws on internal U.S. Census Bureau microdata files, which are top coded at much higher levels of income. For example, based on the top-coding algorithm used by the Census Bureau in 1995, no more than one one-hundredth of the records in any percentile were top coded, except for the first and last percentiles, for which the percentage rises to no more than four one-hundredths. Second, the article uses tenths of percents ("M-tiles"), rather than percentiles, so there is much more jaggedness in the curves. While this feature is partly due to sampling, it is far more importantly related to the propensities of survey respondents to round their incomes to the nearest $500 or $1,000, an important source of nonsampling error. (See G. Rowe and S. Gribble, "Income Statistics from Survey Data: Effects of Respondent Rounding," in Proceedings of the American Statistical Association, Section on Business and Economic Statistics (American Statistical Association, Alexandria, VA, 1994), pp. 77-82.)
17. Unfortunately, there is no simple relationship between the shape of the percentile growth-rate curve and changes in polarization. For example, a monotonically increasing curve is associated with both an increase in inequality and an increase in polarization, but a bimodal growth-rate curve can also indicate increasing polarization, even though a bimodal pattern of growth rates throughout the income spectrum would imply crossing Lorenz curves and hence an ambiguous change in inequality.
18. Also, the chart highlights the risks of drawing potentially misleading conclusions about trends from a single indicator such as the widely used ratio of the 90th percentile to the 10th percentile.
19. Table A1 in the appendix shows the sizes of various age and population groups in Canada and the United States, while table A2 compares the age structures of the two populations.
20. See, for example, P. Gottschalk and T. M. Smeeding, Empirical Evidence on Income Inequality in Industrialized Countries, working paper no. 157 (Syracuse, NY, Syracuse University, Maxwell School of Citizenship and Public Affairs, 1997).
21. T. M. Smeeding, P. Saunders, J. Coder, S. Jenkins, J. Fritzell, A. J. M. Hagenaars, R. Hauser, and M. Wolfson, "Poverty, Inequality, and Family Living Standards Impacts across Seven Nations: The Effects of Noncash Subsidies for Health, Education and Housing," Review of Income and Wealth, September 1993, pp. 229-56.
22. The scale uses the equivalencies embodied in Statistics Canada's Low Income Measure: 40 percent for second and subsequent adults and for first children in single-parent families, and 30 percent for children in all other circumstances. This equivalence scale is very close to one using the square root of family size - for example, as used in Gottschalk and Smeeding, Empirical Evidence on Income Inequality, and in A. B. Atkinson, B. L. Rainwater, and T. M. Smeeding, Income Distribution in OECD Countries: Evidence from the Luxembourg Income Study (LIS), Social Policy Studies, no. 18 (Paris, Organization for Economic Cooperation and Development, 1995).
23. See, for example, D. H. Weinberg, "Are the Rich Getting Richer and the Poor Getting Poorer?" Current Population Reports, series P60, no. 191 (Bureau of the Census, June 1996); also on World Wide Web site http:// www.census.gov/....
24. This result is in accord with Gottschalk and Smeeding, Empirical Evidence on Income Inequality, but contrary to these authors' "Cross-national Comparisons of Earnings and Income Inequality, Journal of Economic Literature, June 1997, pp. 633-87. Smeeding indicates that the former work is the one to be used (personal communication).
25. A similar result was obtained in a recent study. (See "Income Distribution and Poverty in Selected Countries," DEELSA/ELSA/WP 1 (97) 1 /ANN 1 (Paris, Organization for Economic Cooperation and Development, Working Party on Social Policy, Oct. 23, 1997), annex 1, table 5.1.
26. See L. Thurow, "The Disappearance of the Middle Class," New York Times, Feb. 5, 1984, sect. 3, p. 2; and M. Blackburn and D. E. Bloom, "What Is Happening to the Middle Class?" American Demographics, January 1985, pp. 18-25.
27. See L. Thurow, "The Disappearance of the Middle Class," New York Times, Feb. 5, 1984, sect. 3, p. 2; and M. Blackburn and D. E. Bloom, "What Is Happening to the Middle Class?" American Demographics, January 1985, pp. 18-25.
28. R. Summers and A. Heston, "The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950-1988," Quarterly Journal of Economics, May 1991, pp. 327-68.
29. Similar results are presented in Gottschalk and Smeeding, Empirical Evidence on Income Inequality.