A Look at the Rich, the Poor and the Middle Guy in America and in Europe

Yesterday, I reviewed a whole pile of economic indicators showing that, in terms of economic performance, America stands head and shoulders above the other major industrialized nations of the world. If it were a boxing match, the referee would surely stop the fight.

But I also anticipated the response that determined pessimists would almost certainly have. From previous experience, I know that they will acknowledge the obvious (namely, that America's economy is booming), but they will insist that only the wealthy are reaping the benefits, leaving the rest of us high and dry. The question of whether or not that is true is, as I have said before, the economic debate of our time. At least we are not arguing about whether or not the American economy is on a roll. That debate is settled (as I explained in excruciating detail here and here).

Today, I'm only going to show you one simple chart. This differs from my usual tactic, which is to badger you into submission with one informative chart after another. But today's chart is an especially important one because I believe contains what you mainly need to know in order to understand how the benefits of our relentlessly expanding economy are distributed across the population (from rich to poor). Jump to the end of this post if you trust that I did my homework and you only want to see the take-home story. But read on if you'd like to know about my difficult quest to obtain the relevant information.

Some of the information needed to prepare this chart was really hard to find. I probably searched harder for that information than any normal person ever would, which makes me wonder how determined pessimists know that the little guy is not sharing in the economic good times. Where did they find the information that would be needed to form a firm opinion about that? Oh, I almost forgot. They read the New York Times!

My goal is to compare the economic well being of those in the upper, middle and lower economic classes of America to the corresponding economic classes of Europe. I am not setting out to prove to you that the little guy is reaping the benefits of our juggernaut economy (i.e., I am not a determined optimist). Instead, I am simply telling you about my search for the most relevant information concerning this issue, and then I'll tell you what I discovered. I believe it's what you need to know.

One measure that is sometimes used to make cross-national comparisons in the standard of living is per capita GDP. According to that measure, the US clearly surpasses the other major economies of the world, as I showed yesterday. But the problem with that measure is that it represents productivity. Just because you, as a worker, are producing a lot does not mean that you are receiving a lot in return. And determined pessimists usually do not deny that our workers are productive; they just doubt that the workers are sharing the benefits.

Another measure we could use is wages, which I previously discussed here and here. The problem with using wages as a measure of economic well being is that it fails to take into account all forms of income (government subsidies, retirement income, sick pay, unemployment, etc.) and also fails to take into account the fact that wages are taxed at different rates across income levels and across nations. For example, just because your wages are high doesn't mean that the government is leaving any for you to keep.

The best measure of economic well being would appear to be disposable personal income, and the Luxembourg Income Study has collected precisely the data we need. This is a cross-national study of income, and one of the variables they measure is called Disposable Personal Income, or DPI. DPI is calculated by adding up all income (wages, salaries, self-employment income, pensions, unemployment compensation, means-tested cash benefits, sick pay, etc.) and then subtracting off mandatory expenses (e.g., mandatory employee contributions and income tax). Looking at how the DPI is calculated immediately reveals why wages alone do not do the trick. There is a lot more to the income story than wages alone.

So, DPI is the measure we need, and we'd like to see how this measure behaves as a median rather than as an average. An average value goes up even if only the richest get better off (i.e., the super rich alone can pull up the average). Not so with the median. The median value can also be misleading, but it is usually a useful indicator, which is why you often hear about median housing prices rather than mean (or average) housing prices. The median tells you what's going on in the middle range. The average sometimes doesn't.

I wanted to compare the median DPI in America to the median DPI in Europe. All values would be converted to dollars to make the comparison meaningful, and then those values would be adjusted for purchasing power parity, or PPP (go here for more than you'll ever want to know about PPP). This basically adjusts for differences in the cost of living in different countries. So, if the median incomes are the same in Country A and Country B, but the cost of living in Country B is much higher, the PPP adjustment will lower the disposable income measure for Country B (as it should).

Once we have this wonderful yardstick, we can finally make the cross national comparisons of interest. How do those in the middle compare, country to country? We can then expand the analysis by asking how much of the median income people in the bottom 10% of the economy make. Perhaps people in that economic bracket make only 1/3 of the median income, for example. And we can ask the same question for those in the upper 10% (perhaps they make twice the median income). With all of that information in hand, we'd have a pretty good indication of how our fabulous economy distributes its benefits across individuals (from the poorest to the richest) relative to other nations.

The information about the rich and poor was really easy to find. It was discussed by Tom Worstall in a TCS column here (which I found via Instapundit). The information comes from a document entitled "The State of Working America" from the Economic Policy Institute (the pdf of that large report can be found here). Their Figure 8D shows the share of US median disposable income received by the lowest income households (10th percentile) and the highest income households (90th percentile). The information was provided for a variety of countries, and the values were all in terms of the U.S. median income. But although the values were calculated with respect to the median (which is good), the actual median values they used, which tells us how the middle guy is doing (and is what I was looking for), was nowhere to be found. I began to think that this was top secret information for some reason.

I finally found the relevant data in Table A-2 of this report. That table appears to provide just what you would want: "Median DPI per equivalent adult in real 2000 PPP dollars, using OECD PPPs, price adjusted in each nation to correct year." I can't be certain that the information in that table is valid, but it appears to be. I found similar information in Figure 2 of this pdf report.

With this information in hand, I was finally in a position to compare the values of interest for the US vs. the aggregate values for the Netherlands, Sweden, Germany, Finland U.K., and Belgium (which are the European countries for which these measures are available). The story remains virtually unchanged if I compare the U.S. to Germany and the U.K. combined (the two European nations in the G7 for which this information is available), so I'll just present the analysis aggregated over all 6 European nations.

Whew! Still with me? OK, let's finally look at the chart:


All of these measures are relative to the U.S. median DPI (which is set to 100). Memorize this chart. It's what you need to know. As Tom Worstall noted, those in the lowest 10% here have about the same disposable income as those in the lowest 10% in Europe. It's almost an exact tie. At the other end of the scale, the highest 10% here have much higher disposable incomes than the highest 10% over there. Are only the rich making off like bandits? Well, look at the middle guy (i.e., look at the median). The European in the middle makes only about 73% of what the American in the middle makes.

And there you have it. That's how America's fabulous economy distributes its benefits across the economic spectrum (relative to other nations). Those at the bottom of our economic ladder are similar to those at the bottom of other industrialized nations. One would imagine that, in all of these nations, the government tries to ensure that the basic needs of the poor are satisfied (e.g., adequate food, uncrowded living conditions, plumbing, electricity, etc.) without going much further than that. But as you start moving up the economic ladder, you are better off here in America. And that would appear to be true starting pretty far down on that ladder (somewhere below the median for sure).

There is more to say (and I will say it!), but for now, here is the take-home story: In America, you start at the same place on the economic ladder relative to the other industrialized nations of Europe, but you get further ahead of your European counterpart as you climb.