Sunday, March 7, 2010

Income distribution in the U.S and Sweden

We know Americans do better on average. But how about the distribution? After all, the left like to claim that in the U.S only a few hedge fund managers and the like are well off, while the masses live in poverty.

I used the Census American Consumer Survey to make American income data comparable to Swedish income data. Swedish income distribution data adjusts household income to household size (with children having less weight). I further use OECD data to adjust for purchasing power. The data for Sweden is the latest available year, 2007, whereas the U.S data is for 2006-2008.

I think this is a pretty good, but of course not perfect, comparison. You should think about it as comparing GDP per capita taking income distribution into account. More about the method in the end.


Up until around the 45th percentile, Sweden does better than the U.S. After this the U.S opens up a substantial advantage. It is clearly better to be poor in Sweden compared to the U.S, and obviously to be rich in America compared to Sweden.

What matters most is that this graph illustrates that it is better to be middle class in America. The 60% in the middle earn 20% more in the U.S than they do in Sweden, even taking government purchases crudely into account. It is a myth that only a few at the top do better in the American system compared to even arguably the most successful of the European welfare states.


Here is the same data with the differences filled in.


This comparison up until now was between Sweden and all the US. That is not the correct comparison. A better comparison, if we think culture and norms matter, is between Swedes in the Swedish system and people of Swedish ancestry in the American system. I will make those comparisons in the next post.




Method: I combine differences in GDP with distribution data, in terms of differences in income for 10 deciles. Swedish income distribution data adjusts household income to household size (with children having less weight), so I did the same for the American data, giving children the weight 0.35. I further use OECD data to adjust for purchasing power. The data for Sweden is the latest available year, 2007, whereas the U.S data is for 2006-2008.

The comparison is close, but not perfect. Fringe benefits are lacking. The U.S data does not include income taxes and fringe benefits, and many government transfers. The Swedish data is with capital gains. The American income data is top coded. Most importantly, the Swedish data does not include the value of government purchases. The average advantage in household income is 42.6% for the U.S, compared to a 24.3% advantage in GDP.

For a thing such as health care, the bias goes both ways, since American worker’s health care is largely paid for by the employer and not included in income. This effects the distribution of income however, since poor workers in the U.S get less health care than rich workers, whereas they get equal or more in Sweden.

To account for all these problems and in order not to bias the comparison against Sweden, I did a crude adjustment of increasing the Swedish average data to reflect government services, so that the average difference is now equal to average difference in GDP. What is great about GDP is that it includes almost everything. Now, for a perfect comparison for the U.S and Sweden we would need to know exactly how much government cervices each income groups gets, data that is very hard to calculate. Another problem is that this assumes that 1$ spent by the state is worth 1$ spent by the individual, where I believe it is worth somewhat less, something that benefits Sweden in the comparison. But since much of government spending has already been taken into account, and since most of the remainder does not differ significantly in the U.S and Sweden in terms of who it is targeted towards (in both countries the poor get more benefits than the rich), the comparison is likely to be a reasonable reflection of the economic status of various groups.

13 comments:

  1. Recently discovered your blog; absolutely fascinating stuff, keep it up.

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  2. What's missing in this graph is that there are many more people on the left (poor) side than are on the right (rich) side. So the relative size of the red area and the blue area give the incorrect impression that there's an even trade-off between the human impact on the left side versus the right. The Swedish system costs a few some luxury and in return gives a society where no one is destitute and desperate.

    The American approach, I would argue, gives a poorer life to everyone because we all live surrounded by suffering people who are blocked by poverty from achieving their human and productive potential.

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  3. This is a great example, so you can see how vastly the US income distribution skews to the rich: http://video.google.com/videoplay?docid=5297476348213155147#

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  4. What's missing in this graph is that there are many more people on the left (poor) side than are on the right (rich) side.

    No, there is exactly the same quantity of people on each side. Each decile contains one tenth of the population by definition.

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  5. factor each set of incomes by number of hours worked annually and you might come up with a different conclusion than "it is better to be middle class in America". Most middle class Americans would probably think 26% less hours for 20% less income is a great trade-off.

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  6. This income distribution I think is perfect, I don't know enough about economy and those things but it's good, now they should be something different for people who need Cheap Viagra.

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  7. "Most middle class Americans would probably think 26% less hours for 20% less income is a great trade-off."

    I have already written about this at length. Europeans work 10% fewer hours than Americans and have only 5% more leisure.

    And much of the "leisure time" advantage of Europeans has been due to historically having more people out of work, who certainly do not have a high quality of life.

    For the average value of free time to fully account for the Europe-US difference, it should be $57 per hour.

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  8. First – the income per capita in Sweden is about the same as in USA, but it is created through less effort.

    Why would you use PPP adjusted measurements for two developed countries? Sure, Sweden is a bit heavy on public investments such as infrastructure, and thus private goods will be more expensive (if that effort would be spent on e.g. houses instead, the price of houses would of course fall) – but reasonably people derive at least some value from this or it would be political suicide.

    And how do you treat e.g. the fact a much larger part of US GDP consist of health care expenditure. Are you assuming that the US healthcare system produce twice as much benefits?

    What about military spending. What benefit does a super sized army give to most US citizens?

    What about the cost of police and prisons?

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  9. You're mistaken--badly. You grossly overestimate Sweden's real income versus that of the US. Swedish payments are almost all in cash, whereas US are almost all in goods. Even tacking on the equivalent of 9.9% GDP to account for Sweden's healthcare, the US comes out like roses. For an accurate representation of REAL benefits, look here: http://www.heritage.org/research/reports/2004/08/two-americas-one-rich-one-poor-understanding-income-inequality-in-the-united-states

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  10. G. Liang:

    You fundamentally misunderstand my methodology.

    Erik:

    The U.S GDP per person is about 30% higher than Sweden raw and about 50% higher than Sweden, comparing ethnic Swedes. Contrary to what you claim, Americans do not have less leisure than Swedes, the (minor) differences in hours worked reflect more hours worked in the household in Sweden.

    “a much larger part of US GDP consist of health care expenditure. Are you assuming that the US healthcare system produce twice as much benefits?”

    This is a valid point. However, you could make the EXACT same argument for large parts of the Swedish state, which is quite inefficient. The data now assumes that every dollar spent by the state is worth 1 dollar of private sector output. I think on average, the money spent by the state produces less welfare than the private sector, and this share is much higher in Sweden. So if anything the Swedish data overestimates output.

    Police and prisons are about 1% of American GDP, don’t use ideological clichés.

    If you don't PPP-adjustments, for one thing every comparison you make will become invalid a couple of years later when exchange rates have changed. And OF COURSE you need to adjust for the fact that Sweden is one of the most expensive countries in the world, for a given product. Do you think paying 50% more for a I-pad makes the I-pad bought in Stockholm rather than Ohio 50% better?

    You only object to PPP because it bothers you that the U.S does better in purchasing power.

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  11. I can't seem to replicate your results for Swedish-Americans using the PUMS data from the census. Did you use the median income for Swedish-Americans and then infer a distribution based on the general income distribution by quintile of the US (or for US whites?). Or does the Census actually break out average incomes by decile for each ethnic group?

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  12. Salary offered in one country may not be necessarily sufficed to sustain in another country. Individuals in big number relocate to another country for work assignments, sometimes for better growth prospects every year, with some of them fear cost of living crisis.

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