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Are Americans better off than the Dutch?

From Dani Rodrik's Blog:

For a lot of questions, comparisons of per-capita GDP yield the correct answer to a first-order of approximation. For example, are Americans richer than the Chinese?  A comparison of GDPs per capita, adjusted for PPP differences, yields an unambiguous answer in favor of the U.S.  Yes, income may be distributed more unequally in the U.S., but that is largely irrelevant. As the chart below shows, very few Chinese are richer than the poorest Americans.  The distributions of income for the two countries barely overlap.   

(Note these data are for 2005. The Chinese distribution has caught up some with the U.S. one in the meantime.)

But what about the following question: Are Americans richer than the Dutch?  The average income in the U.S. is about 20 percent higher in the U.S. (again, adjusting for cost-of-living differences). So our inclination may be to answer in the affirmative.  But when average incomes do not differ by a large margin, income distributions do matter a lot. It turns out that the answer to the question depends very much on where in the income distribution we look at.

The following chart shows the average incomes of different income groups in the two countries. In each country, population is split into 20 equally-sized groups (“ventiles”), ranked from the poorest to the richest.

The two distributions cross, roughly at the middle.  The bottom 40% or so of the population is better off in the Netherlands, especially as we go lower in the distribution of income.  The bottom 5% have nearly double the income in the Netherlands.  The top 50%, by contrast, are significantly better off in the U.S.

So are the Americans better off than the Dutch? I cannot tell you.  But I can say that per-capita GDP or aggregate productivity numbers cannot answer the question.

By the way, these data on income distribution come via Branko Milanovic.  Check his book and web page.

And if you want to have more fun comparing income distributions across and within countries, check this puzzle.  (The answer is here).


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