In my post on EU-US convergence, I found that the US was similar to the leading eurozone countries in both productivity (output per hour worked) and employment-population ratio, so that the difference in income per person is mostly explained (in some cases more than explained) by differences in hours worked per employment person. I didn’t take the distribution of income into account, since the data sources I was using there did not provide anything useful. But commenter Detlef found a blog post by Maximilian Hagemes at the World Bank site which links to a useful paper by Piketty and Alvaredo on cross-country comparisons of income concentration. For most eurozone countries, they show that the top 1 per cent of households gets about 8 per cent of total income (the presentation is graphical, but in any case, there is no point in going for spurious precision with numbers like this). For the US, the most recent data gives an 18 per cent share. So, the share of national income going to the remaining 99 per cent is about 10 per cent smaller in the US than in the eurozone.

There are a couple of ways of looking at this.

Update I was too subtle for my own good in the original version, putting up the idea that the share going to the rich could be viewed as a kind of tax, and leaving it to readers to draw the conclusion that (99 per cent of) Europeans get better returns from the money they pay to governments than do their American counterparts from a system where a large share of total income goes to the top 1 per cent. In the update, I’ve spelt this out.

The data on the top 1 per cent share I used was out of date. The figure for 2007 was 23.5 per cent. At this level, the share of US income that flows as disposable income to the bottom 99 per cent is probably below that of most European countries (the exact outcome depends on how much tax is paid by the top 1 per cent). The recession probably took a bit more from the very rich, but they are already bouncing back, at least on Wall Street.

The simplest is to adjust the comparisons given in my previous post by excluding the income of the top 1 per cent. There we saw that income per hour worked in the US is about 15 per cent higher than for the EU as a whole. But, given the much larger share going to the top 1 per cent, most of this difference disappears for the remaining 99 per cent, taken as a group. Within that group, Americans in the the top decile or top quintile (but not the top 1 per cent) do much better in relative terms than Europeans, while those in the remaining 80 or 90 per cent do relatively worse, as Piketty and Alvaredo show. So, in terms of income per hour worked, most Americans are probably a bit worse off than their counterparts in the EU as a whole.

But of course, the EU is a very disparate place, as is the US. France, Germany, Belgium and the Netherlands are all above 90 per cent of the US level in terms of total income per hour worked, and therefore ahead of the US as a whole once the top 1 per cent is excluded. We can then say that (excluding the 1 per centers) income per hour worked in the US is significantly below that in the leading eurozone countries. The gap is made up by longer hours of work and (to a smaller extent) by higher female participation in market employment[1]

There’s another way of thinking about this that I find a bit more interesting. In some sense, the top one-percenters are competing with the state for the job of running the economy. If they aren’t burdened down with high taxes and income redistribution, so the free-market case goes, they will do a much better job in promoting innovation, better resource allocation and so on, to the benefit of all. And through philanthropy, the top 1 per cent can help to provide public goods, health services and so on that would, in a social-democratic system be the responsibility of the state.

So, the income share accruing to the top 1 per cent may be seen as an alternative to paying more of national income in tax revenue for governments. It makes sense then, to combine the two, to see how much of total market income is being turned over to those who run the economy, fund public services and so on. Conversely, post-tax market income, excluding the proportion going to the top 1 per cent, is what is left over for private expenditure.

As with the earlier post, the answer is that, on this combined measure, the EU and US are fairly similar. Wikipedia cites Heritage estimates that the US tax revenue share of GDP is 28 per cent compared to 40 per cent for the Netherlands, 41 per cent for Germany and 46 per cent for France. Simply adding in the proportion going to the very rich (a very crude way of doing the adjustment, but this is a blog post after all) brings the US share up to 46 per cent, while the other three come out at 48, 49 and 54 per cent respectively

Within the inevitable margin of error, we can reaffirm the conclusion from the earlier post that there is no significant difference between the US and the eurozone leaders on output per hour worked or on employment population ratios. The big differences between the two are
(a) Employed Americans work longer hours (offset by the fact that Europeans do more household work)
(b) In both the EU and US, ordinary income earners receive about half of total market income as private disposable income. In the US, however, a much larger proportion of the other half goes to those in the top 1 per cent, while in the EU it is mostly tax revenue. It seems clear to me that that the Europeans get a better return for their money

fn1. Conversely, other parts of the EU are behind. And while it’s difficult to get really accurate state-level or regional figures for the US, it’s obvious that you can go the other way, and point to US states that are better off or worse off than the EU as a whole or the leading eurozone countries.

With the country still waiting for the final results of the Saturday vote, reporters in the capital, Canberra, got a dose Wednesday of the self-described “force from the north” and the other independent legislators who could hold the balance of power in Australia’s first deadlocked Parliament in 70 years.

“If you live in a country town in Australia, every year you own a business, you know it’s going to get worse and worse,” Mr. Katter, a 65-year-old former stockman, said at the National Press Club on Wednesday. “Every year, you know your kids are going to leave because there are no jobs for them. Maybe a high school closes this year, maybe you lose your dentist next year.

“The people of rural Australia have put some of us here. They expect a return for having done that. As far as I’m concerned, they will get a return.”

Since the voting Saturday, the Australian news media have been scrambling to get a fix on Mr. Katter and the other once-obscure lawmakers who may be called upon to resolve the stalemate in the House of Representatives, where neither the incumbent center-left Labor Party nor a coalition of the conservative Liberal and rural-based National parties appear to have captured the 76 seats needed to form a majority government.

The final election result may not be known for another week. But Prime Minister Julia Gillard and her conservative rival, Tony Abbott, have already begun courting Mr. Katter, who has made no secret of how he intends to use his newfound power: to demand a “fairer go” for rural Australians.

All three independents hail from sparsely populated rural areas, where voters have long been at odds with the mainstream parties in Australia’s urban-focused political debate. Access to education, hospitals, jobs and telecommunications are key issues for voters in “the bush,” the vast stretches of scrubby grasslands that are home to about a quarter of Australia’s 22 million people.

The divide between urban and rural voters has long been a feature of Australian politics. The country’s vast expanses and relatively small population and tax base make it difficult for the government to provide basic services to many remote areas. But many country dwellers feel that their concerns are ignored by politicians scrambling for the bulk of votes in Australia’s heavily populated cities.

The three independents are all former members of the center-right National Party, the rural element of Mr. Abbott’s conservative coalition. But they have all bristled at suggestions that their former allegiance makes them more likely to support Mr. Abbott in a hung Parliament. While Mr. Katter does not endorse the Labor Party, he has described the conservatives as being “about as popular as a black snake in a sleeping bag,” with many farmers unhappy about the free trade deals enacted by the former prime minister, John Howard.

Tony Windsor, an independent representative from a northern part of New South Wales, told Sky News this week that he had rid himself of “two cancers” when he gave up smoking and split from the Nationals in the early 1990s. The 59-year-old former farmer and economist has been a bipartisan negotiator since he entered Parliament in 2001 and has said he is now more interested in forming a stable government that will last a full three-year term than in trading on particular favors for his electorate.

Rob Oakeshott, a 40-year-old from New South Wales, has been one of the loudest voices for parliamentary reform since he gained a platform as potential kingmaker in this election. He has said that he wants to reduce the stranglehold that Labor and the coalition hold on Parliament by making it easier for third parties and independents to introduce and debate legislation.

Mr. Oakeshott, who is widely reported to have allowed a refugee to stay in his home and has called for a more compassionate approach to asylum seekers, has also called on his fellow lawmakers to adopt a more collegial tone in Parliament, where petty insults and name-calling frequently dominate the debate. A young, charismatic leader with a personable style, Mr. Oakshott was once hailed as the next great hope of the National Party, but he left the party in 2002, saying that it had been co-opted by property developers and other special interests.

“Australia was completely underwhelmed by both major parties and by the way Parliament itself has been behaving,” Mr. Oakeshott said. “This is a moment where we can all do some things for all of us to get some better outcomes.”

After holding closed-door talks on Tuesday, the three emerged saying they would not necessarily vote as a bloc if called upon to break the Parliamentary stalemate. While they are all advocates for rural Australia, they differ on several key points, namely climate change, how to handle a recent influx of asylum seekers and the government’s proposed tax on mining profits.

They have said they will not engage in formal talks about the possible shape of a minority government until the official election result is finished. But on Wednesday, the three presented Ms. Gillard and Mr. Abbott with a list of seven demands, including a full briefing on the state of the economy, and an independent audit of how much the two opponents’ election promises would cost.

Ms. Gillard and Mr. Abbott could wind up having to deal with a fourth independent, Andrew Wilkie, whose election to a formerly safe Labor seat in the southern state of Tasmania appears likely but has not been confirmed. Another factor is Adam Bandt, a Greens party representative from Melbourne, who has said he would prefer to support a government led by Ms. Gillard but has not ruled out a compromise with the current opposition.

Meanwhile, Mr. Katter said he would continue to push the hardest bargain for his constituents on the banana plantations and in the coal mines of northern Queensland: “I’ve bought and sold cattle for a large portion of my life, and I like to think I can drive a deal.”

Bob Katter on the front page of the NYT. Who’d have thunk it?

The NYT ran yet another round in the long-running EU vs US series a week or so ago. Although it’s not covered explicitly in the NYT, there is actually some news to report here, in addition to rehearsal of the same old themes.

For quite some time, the US and the leading EU countries have been fairly comparable in terms of output per hour worked. The US has had higher output per person for two reasons: a relatively high employment/population ratio and very high average hours worked per person. The first of these is important because it raises the possibility that EU countries performing well on productivity measures are benefiting from the “Thatcher effect” . If low-skilled workers are excluded from employment, for example by restrictive macro policy, as in Thatcher’s case, or by labor market sclerosis, as claimed by critics of European institutions, then productivity measures are artificially boosted.

This issue is now moot. As a result of the crisis, the US employment/population ratio has dropped sharply, to the point where the US is now little different from the EU. The difference in GDP per person between the US and leading European countries is driven primarily by differences in average hours worked by employed people.

To get the data on this, I’ve had to combine Eurostat and OECD info (always a little problematic, but neither had all the info I wanted).

From Eurostat, the E/P ratio (total employment/pop 15-64) for the euro area was 58.5 in 1997 and rose to 64.8 by 2009 (France 64.2 , Germany 70.0). Over the same period, the US ratio has fallen from 73.5 to 67.6, with the bulk of the decline in the last couple of years. The remaining difference is entirely due to the higher US employment-population ratio for women – the ratios for men are virtually identical.

Turning to the OECD for information on productivity and GDP per capita, these tables shows that relative to the euro area as a whole, the US still has a substantial lead in productivity (about 15 per cent). But for the leading European economies, like France, Germany and the Netherlands, the productivity gap is below 10 per cent, which is well within the margin of error associated with PPP conversions[1]. Particularly for the latter two, the big difference is in annual average hours worked (1681 for the US, 1390 for Germany, 1378 for the Netherlands). The difference in average hours almost entirely explains the gap in GDP per person between Germany and the US, and more than explains the gap for the Netherlands.

As is well known, Europeans tend to offset their lower hours of paid work by doing more household labor. Taking this into account properly would diminish the gap in both directions – relative to the US, European hours of work would rise, and so would output per person.

I was hoping for a good exposition of this from Peter Baldwin whose book The Narcissism of Minor Differences: How America and Europe are Alike has a promising title (I haven’t read it yet). Unfortunately, he only gets half of the story, saying

Americans work 23 percent more than Germans in the marketplace. However, once we factor in household labor, the drudgery that allows us to function in the world, the difference in total work drops to 12 percent. And interestingly, the figures for time actually spent at leisure are almost precisely the same for the two nations.

That Americans work 12 percent more than Germans seems to be the hard kernel that emerges from the statistics. Considering that for that 12 percent investment the American G.N.P. per capita is 32 percent higher than the German, this seems a defensible trade-off. Perhaps Americans have collectively decided to work somewhat harder to be substantially better off.

The problem here is that Baldwin has missed the point that household labor is productive.

Coming to my own take on all this, it seems that the European and US systems yield roughly equal productivity, and roughly equal labor market performance (as measured by E/P ratios). Higher European taxes mean more and better public services (at the cost of reduced private consumption) and they are also (along with social preferences) reflected in lower hours of work and more household labor. I know which looks more appealing to me, but there’s no obvious way of saying which is best.

Rather more clear-cut is the price paid by the US in terms of greater inequality. Compared to the European case, and to the US in the past, the top percentiles of US households collect a much larger share of total income, and there doesn’t seem to be any net economic payoff for this.

fn1. (Very wonkish note) Although PPP numbers are often treated as if they are are raw facts, they are index numbers which are fundamentally imprecise (even if the underlying data is perfectly accurate, which it isn’t). From work I did with Steve Dowrick in the 1990s, I estimate the difference between upper and lower bounds at around 10 per cent. It’s likely that any bias in PPP numbers favors the US. That’s because they are a generalized kind of Laspeyres index, and (as I understand it) the base data is derived largely from Europe.