China Isn't as Rich as They Say, and Making U.S. Workers Poorer Didn't Help

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Wednesday, 19 March 2014 04:40

In a piece discussing patterns in world growth over the last three decades Eduardo Porter told NYT readers:

"What’s happened is that while income growth stalled for middle-class workers in developed countries and surged for people in the 1 percent, it also grew sharply for hundreds of millions of workers in China, India and other Asian countries. In the late 1980s, for instance, workers in the middle of China’s urban income distribution made 56 percent of the median American income, according to Mr. Milanovic’s calculations. By 2008, that figure rose to 71 percent."

It is unlikely that people in the middle of the income distribution in urban areas of China had an income that was 71 percent of median in the United States in 2008. According to the Penn World Tables, per capita income on a purchasing power parity basis (the appropriate measure for comparisons of living standards), per capita income in the United States in 2011 was over $42,000. It was just under $8,000 in China. Overall, income is somewhat more unequally distributed in China than in the U.S., but urban areas have far higher living standards than rural areas. However even if we say this doubles the income of middle income urban Chinese, this would still only get them to 40 percent of the average in the United States.

While China's workers have enjoyed enormous gains in living standards over the last three decades, their standard of living is still well below the median in the United States. These gains have continued since 2008, with per capita income in China rising by nearly 60 percent in the last six years according to the I.M.F.

It is also worth noting that these gains need not come at the expense of workers in the United States and other wealthy countries. In principle, if U.S. workers had seen larger gains in income they could have been an even bigger source of demand for China's exports. In this context, the budget reducing policies of Washington politicians are lowering incomes in both China and the United States.

Also, policies that would promote equality in the United States could also yield large benefits for China. For example, weaker patent and copyright rules would make drugs and other products cheaper for people in China, giving their workers more purchasing power, while also reducing the patent rents received by the wealthy in the United States.