UK vs US living standards

Fraser Nelson's claim that the UK is poorer than any US state other than Mississippi has met with some scepticism on Twitter. However, I reckon he might be right.

Put it this way. Last year, UK GDP was £1612bn in current prices. With a population of 64.1m this gives us GDP per head of £25161. With the exchange rate averaging $1.57 last year, we have GDP per head in dollars of $39503. US GDP (pdf) was $16768.1bn spread over 316.3m, giving GDP per head of $53013. These are close to Fraser's numbers.

One reason for this difference is simply that Americans work more; the OECD estimates that the British work an average of 1669 hours per year whilst  Americans put in 1788.

If we look only at wages, though, things look very similar in the UK and US. The ONS estimates that the median full-time male wage was £556 per week in 2012, whereas the BLS estimates that the median full-time male worker in the US got $860. At an exchange rate of $1.57, these are very close. This is quite consistent with US GDP being higher, though, to the extent that non-wage incomes such as profits and the self-employed are greater, and to the extent that US earnings are higher because of higher wages at the very top.

But what about the cost of living? In many respects, this is lower in the US, which means that whilst the typical wage-earner brings in roughly the same in the UK as in the US, his money goes further in the States.

Housing costs for sure are lower. The median house in the US costs $222,900 or £134277 at today's exchange rate, whereas Lloyds Banking estimates the average UK house to cost £186322 (pdf) (yes, there's a difference between average and median, but I doubt this explains all the gap).To be more precise, you could get a four-bed house with five acres in Little Rock, Arkansas for the price of a one-bed flat in Hackney.

Many consumer prices are lower in the US than UK. If we compare table P4 of the BLS's CPI release (pdf) to table 62 of the ONS's CPI report, we find:

 - 12 eggs cost £3.09 in the UK but $1.95 (£1.17) in the US.

 - A gallon of milk costs £3.68 in the UK but £2.34 in the US

 - 1kg of beef mince costs £7.96 in the UK but £5.15 in the US.

 - 100g of coffee costs £2.78 in the UK but 67p in the US.

A comparison of prices at Amazon.com and Amazon.co.uk reveals a similar pattern. For example, a 160GB iPod costs $259 in the US (£156) but £175 in the UK. And a quick glance suggests car prices are also lower in the US. The US isn't the home of the free, but it is the home of the cheap.

Not all comparisons are so favourable for the US - there's the not inconsiderable matter of health insurance, for one thing, and Harvard's a darned sight more expensive than Oxford.

And of course, the cost of living is only part of what makes a place desirable to live in: some of us think it a good thing that the UK's police forces don't model themselves on the Islamic State, for example.

Nevethless, the point is that Fraser's claim isn't outrageous, as it is consistent with other data.

Comments

[Tim Worstall]

We can (as I did at Forbes) go further. Fraser adjusted for PPP. But there's a PPP adjustment to be made between US states as well. $100 is worth from $80 to $115 across different states. And yes, the poorer states the money goes further.

Adjust Mississippi's GDP per capita for this and Britain's poorer than that.

Tim Smeeding did a paper for LIS looking at bottom 10% disposable incomes, various EU and US. One line in there is exactly the point you're making about food and medical care. While he didn't insist upon it he thought the two were pretty much a wash, one balancing the other.

There's also this: Americans tend to live in larger, better heated, houses and consume more calories. might not be quite true of the modern world but that's historically been a signifier of greater wealth.

[ajay]

On the other hand, median household income in Mississippi is $39,295. Median household income in the UK is $43k, ahead of not only Mississippi but pretty much all the southern (Mississippi, South Carolina, Kentucky, Arkansas, Louisiana, Tennessee).

I accidentally looked at some of the comments to the Spectator piece. Despicable stuff.

[Stevenclarkesblog.wordpress.com]

I can believe this. A more interesting question is why?

More resource endowments? More geographical mobility? Less regulation? Less planning restrictions> A more entrepreneurial spirit? Less welfare? Less history?

[Luke]

"More resource endowments? More geographical mobility? Less regulation? Less planning restrictions> A more entrepreneurial spirit? Less welfare? Less history?"

Are you talking about the US or Argentina?

[john b]

Healthcare can be quantified quite easily: in the US it costs twice as much as the UK (9% and 18% GDP, including all public and private spending in both cases) - ie the UK is 9% richer than the US for the same reported GDP figure, vaulting most of the deep South to reach Georgia.

My scepticism in the tweet you linked was actually about Germany; it spends 11% of GDP on healthcare, so the difference would elevate it from Tennessee to Vermont.

So that seems like a plausible explanation for a fair chunk of the difference between apparent lifestyles and $ GDP - and like the UK, the German average is brought down from our perception of Germany by some regions that are undeniably very poor.

(all this assumes healthcare is not appreciably better or worse in any of the three countries; in practice that's probably true for the UK and US and better in Germany than either).

[chris]

@ Luke, Steven - one factor is productivity in retailing. Big box retailers have reduced prices a lot, thus raising real incomes:
http://econpapers.repec.org/paper/umcwpaper/0401.htm
@ Tim - I guess you're right to at least some extent re PPP. I wanted to avoid this, as I'm not sure Fraser's sceptics would be swayed by a discussion of PPP so much as by micro level evidence on prices of particular goods.
@ John B - I agree. One big question here is: if Americans' incomes are so much higher than ours, why don't they save more? This should tell us that some Americans incur higher costs in some respects than us.

[Tim Worstall]

"Healthcare can be quantified quite easily: in the US it costs twice as much as the UK (9% and 18% GDP, including all public and private spending in both cases) "

Not so much any more. The Brown Terror took the UK to 11 or 12% of GDP on health care didn't it?

[John Smith]

I've always believed the US to be better off than us - just look at some of those homes on "Gypsy Brides US". They're "local-lord-of-the-manor" compared to here in the UK. (Don't they build them more cheaply out of wood though cos different building regulations.)
Also, my profession - sales - is waayyy much better paid in the US than here (name therefore well and truly witheld!)
I get the impression that invested capital (PPE) is perhaps higher over there. And also returns to education cos more IT and stuff. Aren't medics the largest constituent of the 1% (in the US)?

[TD]

Quick correction to one of your jibes: you joke that the U.S. "isn't the home of the free, but it is the home of the cheap." The U.S. anthem lyrics actually go "land of the free, home of the brave."

[Dave Timoney]

This looks like silly season filler. Alaska comes top of Nelson's league because it produces lots of oil and has a small population. Florida is mired in poverty (#48) because the coffin-dodgers contribute little to GDP.

You'll note he doesn't sub-divide the EU comparators, so Germany squeezes in at #39 when Bavaria (or Lombardy or Isle de France, for that matter) would be much higher.

The lowly ranking of the UK obviously owes much to the "imbalance" of the British economy that ideologists like Nelson have worked so far to produce. GDP per capita for the City of London would make an interesting adddition to the list.

[p0wak]

An alternative approach (based on purchasing power) confirms this for the average wage earner, but the minimum wage guy is worse off in the US: http://wp.me/p3tZzY-5D At least if we can base an analysis on Big Mac prices. ;)

[Socialism In One Bedroom]

I think p0wak makes an interesting point, what is a Marxist, or indeed a socialist, doing focusing on the aggregate data. The whole point of class ridden societies is to get beyond the aggregates?

[john b]

Tim: I was looking at the 2012 World Bank numbers http://data.worldbank.org/indicator/SH.XPD.TOTL.ZS

[Keith]

I am unclear why you have highlighted this except silly season boredom.

The UK and USA are very developed and were/ are the leading world powers for two hundred years.

The differences between them are trivial compared to the rest of the globe. There is little policy relevant information in such comparisons. The tendency for both right and left to make a big deal about such comparisons is more about emotion than economic substance.

[Andy]

The profile & number of immigrants we have in the US could also explain a great deal of the differences in the living standards between the 2 countries.

[ChrisA]

If you look at the Maddison project data on long term GDP trends, it appears the higher PP GDP in the US started only after the second world war. Which makes sense, basically the UK was not only heavily bombed, but also ended up with big debts from the war. But the trend of higher US vs UK per head GDP stayed broadly flat with the US about 40% higher than the UK until about 1981, i.e. despite the end of the war there was no return to the previous pre-war parity. Then finally the UK started to improve relative to the US reaching about 28% less than the US in 2010. I wonder what happened to the UK in the early 1980's that started to improve their relative performance?

[Sean]

It's worth looking at why Mr Nelson's analysis feels counter-intuitive. Americans may be richer if we forget about: the terrible pot-holed roads, shanty towns of the unemployed, terrible government IT, low levels of consumer protection, poor mobile phone systems, etc etc. How can we figure these into an analysis of whether the US is richer?

Also, does the very high incarceration rate affect the income figures?

[Simon Reynolds]

So, if we in the UK all work much harder and generate 50% more GDP per head we could boast: "we're wealthier than Iowa." Clearly a worthwhile aim in life. But, I'm planning to put my feet up for the next twenty years, so maybe Fraser Nelson and Tim Worstall could work that extra bit harder to make up for my laziness.

Simon Kuznets, the first to produce a serious estimate of US national income, was very perceptive about how useful GDP is as a measure of welfare, when he wrote (back in 1934):

"And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above."

https://fraser.stlouisfed.org/docs/publications/nipab/pages/58491_1930-1934.pdf

[Hari]

Not seen this mentioned yet, so I'll throw it in: Doesn't a large low-paid underclass increase your $PPP by lowering the cost of living for the rest? I'm thinking of all those US immigrants and the ethnic groups that are permanently stuck at the bottom.

[Hari]

Here's Bobby Kennedy in 1967...
“Our gross national product...if we should judge the United States of America by that - counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children.

Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans.”
― Robert F. Kennedy, US senator. March 18th 1967
http://www.goodreads.com/author/quotes/98221.Robert_F_Kennedy