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An American idea about the Canadian middle class

September 25, 2013

The suggestion that the middle class is stagnating, the linchpin of Justin Trudeau’s economic platform—to the extent it exists—is an idea shamelessly borrowed from the United States.

Shameless it may be, but it is, nonetheless, true.

Clearly there are some ways in which we are all better off not withstanding what President Obama tells the American public, and notwithstanding how closely Canadian political leaders listen to him.

In 1980, a cell phone was something carried in a brief case; and a Sony Walkman—you surely recall the portable cassette player the size of a thick paperback that strapped “conveniently” to your belt?—was the cutting edge musical accessory.

But shops filled with more variety, and more quality, make us and our kids better off only to a degree, and not only because the power to blow your ear drums out has increased exponentially.

In 1980 middle-income Canadian families reported a total of $57,000 on their tax returns, and 30 years later, … well exactly $57,000.

Median income and low income combined

Not only that, the last thirty years have not been particularly pro-poor. Inequality in the lower half of the income distribution has not improved at all. In 2010, about one out of every eight Canadians earned less than half of someone at the halfway point of the income distribution, no different than in 1980.

Annual hours of work in selected OECD countriesIt’s not as if we are working less to take extra time to enjoy all the things we can buy after thirty years of progress. We’re pretty well working as hard as we did 30 years ago, and if the time spent punching the clock has fallen somewhat, it is as much due to involuntary unemployment as it is a choice to enjoy family, friends, and the  things that make a good life.

Pollsters tell us that our sense of economic security, and our sense of what the future holds, is no better, maybe even worse.

So if the typical family hasn’t gained, and if the relatively poor have not gained, then where has all the money gone? After all, Canada is now a much richer place.

Almost one half of every dollar earned in the country goes to the richest one-fifth. In 1980, 42 cents of every dollar went into the pockets and bank accounts of the top 20%, a share that has slowly and steadily increased to reach a bit more than 47 cents. But even this understates the concentration of incomes since the underlying driver is the higher and higher proportion flowing to the top 1%, who collected 8 out of every 100 dollars earned in 1980, and 12 of every 100 in 2010.

Income shares of each quintile combined

At the same time the slice of the pie going to those in the bottom has not changed, while those in the middle have, indeed, experienced a decline in their share.

These patterns are remarkably similar to those in the United States. In fact, I have shamelessly borrowed the entire structure of this post from an article in The New York Times by Eduardo Porter summarizing a report released by the US Census Bureau.

Thirty years of economic growth; thirty years of incremental but steady increases in productivity; after major public policy initiatives, like free trade with the United States and other countries beginning in 1980s, like the relentless and unforgiving pursuit of zero inflation that unleashed a major recession in the early 1990s, like slashing government deficits “come what may” in the years that followed, like a major run up in commodity prices and expansion of the resource sector, partly subsidized through the public purse, policies conducted in the name of increased prosperity and a better future for all; and yet after all of this, the typical family now feels less secure and has no higher a standard of living than a generation ago.

It’s quite reasonable to confidently ask why, even if this just might be the same question Americans are also asking themselves.

[ A version of this post was published in The Globe and Mail, September 26, 2013. ]

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10 Comments
  1. Canada experienced a depression in the early 90′s and has done pretty well ever since (this is the span of my lifetime). The timing of the U.S. experience is the exact opposite. This fact doesn’t seem to inform your analysis.

    Second, the numbers look better measured in income after taxes and transfers. Even more relevant would be a measure of median consumption.

    Finally, the fact your graph of the share of the population w/ income 1/2 the median is flat is a relief. It’d be nice if it fell, but I would like to see how it changed for the U.S.

    • It is absolutely correct to suggest that you may get different perspectives on this, or many issues, depending upon the time horizon adopted. It is important to take as long a view as the data will permit, and to relate that to the underlying causes. The run up since the mid 1990s is in part due to business cycle developments, and then to commodity price booms. But that doesn’t help us understand fully the underlying structural changes.

      Also the very important thing you raise is what is the counterfactual, what would have happened otherwise.

      Thanks.

  2. Enonymous permalink

    You mention the pursuit of low inflation. Has the actually been good for the middle fifth? Moderate inflation effectively increases the taxes paid by the highest earners since real gains of zero on financial assets still generate taxes when the (nominal) gains are realized. Also, moderate inflation erodes the debts of the middle fifth and lower (who tend to have more debts and not so much savings).

    Probably I’m confused, but I’m surprised that economists rarely discuss the rise of inequality and the fall of inequality.

    Thanks.

    • Thanks so much, but I’m not certain what you mean by your last statement, “economists rarely discuss …” .

      • Enonymous permalink

        Sorry, I meant to say “Probably I’m confused, but I’m surprised that economists rarely discuss the rise of inequality and the fall of *INFLATION*.”

        By the way, one other thing that confuses me is the discussion that middle class incomes have stagnated vs. plots of per capita GDP. Anecdotally, it feels like middle class incomes have stagnated but accordign to FRED (http://research.stlouisfed.org/fred2/series/USARGDPC), per capita GDP was under $30K in 1980 in the US. How can the following be reconciled:

        1. Median household incomes today are around $50K (http://quickfacts.census.gov/qfd/states/00000.html)
        2. Median household incomes have stagnated.
        3. Per capita GDP has roughly doubled since say 1975.

        It seems like 1 and 2 imply that 1975 median household incomes should be around $50K in today’s dollars but 3 implies that household incomes must have been a lot less in 1975.

        I’m sure I just misunderstand what these things mean but can’t figure out my error. Any help in understanding what is going on among these seemingly contradictory data points would be much appreciated.

        Thanks,
        -E

      • These are excellent questions that really show a positive engagement on your behalf.

        First off, I can’t speak for all economists and for what is written in the media. But you may see a good deal more discussion about inequality for the simple reason that the data are showing very dramatic changes. It used to be that income inequality was a boring topic that many researchers paid little attention to. Roughly, during the 1950s, 1960, and 1970s there were no dramatic changes in the way the total surplus of society was distributed. This started changing in the late 1970s and 1980s, and by the 1990s economic research started paying attention in the hope of explaining why, and eventually this fed into public policy debate which reflects a broader social concern, and generates more research and discussion. I think this is positive. At the same time during the 1960s and particularly during the 1970s and 1980s inflation was a big concern: in the data, in research, and in the way people’s lives were impacted. It is not to say that it isn’t, as many economists still wonder about the appropriate setting of inflation targets like zero percent. This is a core aspect of the debate in the conduct of monetary policy.

        So my sense is that there is a continual conversation about these and other issues, but their salience ebbs and flows as public policy concerns and developments in the data steers research in one way or another.

        Your other question is very important, and the statistics can be confusing.

        First, whenever you look at statistics like GDP, the Gross Domestic Product (that is, the money value of all goods and services produced in the economy) be certain that it is being measured in so-called “constant” or what is sometimes called “real” dollars. That is to say that the measurement holds changes in prices due to inflation constant by using the value of the currency in a particular year. (The valuation based on “current” or “nominal” dollars will reflect not just changes in the amount of goods and services, but also changes in the overall level of prices. Ironically “real” dollars are not real at all, in the sense of being observed in reality!)

        Second, the discrepancy you are pointing to is an indicator that inequality has grown, and reflects the difference between “median” and “average”. Both of these statistics are used to portray a “typical” or “a most common” tendency in the data, but they do this differently.

        The median just refers to being exactly in the middle. If we took all households and rank them according to their incomes from lowest to highest, then the household with the “median” income is that household exactly in the middle, with half of the households having a lower income and the other half having a higher income. Because all of this depends on rankings the median does not change if income inequality goes up. For example, give the top household an extra billion dollars, well inequality has clearly gone up but this does not change the ranking and therefore does not change the median.

        But it will change the average. The average is the sum total of all incomes divided by the number of households. You can think of per capita GDP as just that: the money value of all incomes divided by the total number of people. Averages can be skewed by changes at one extreme of the distribution.

        So when you observe that per capita GDP has gone up, but that the median has not this is an indication that inequality has increased. Yes, our society is much richer than it was since say 1975—as signaled by a higher GDP per capita—but the gains have not been shared equally, they have gone to a relatively greater degree to those in the top of the income distribution while the median household has not seen any increase in its income.

        You can see this illustrated for Canadian data in the fifth graph, called “Average incomes have been outpacing median incomes,” in this post: http://milescorak.com/2012/12/16/three-rules-for-good-pundit-behaviour-or-if-you-like-how-to-obstruct-the-debate-on-inequality-in-three-easy-steps/

        I hope I’ve interpreted your questions correctly, and that this helps.

  3. Senator Dr. Dhanayshar Mahabir permalink

    Miles, your analysis is certainly cause to generate anxiety . $57000 as middle income, over a 30 year period , is certainly a major stagnation. Clearly growth in the Canadian Economy during this period did not benefit the middle income earner. It would be beneficial to obtain some info about the cost of middle income homes over the past 30 years and other goods in the bundle to determine by how much the bundle of goods consumed in 1980 by the middle income earner has shrunk in say 2010. .

  4. slantendicular permalink

    I appreciate this analysis. It would be nice to see these data on median household income controlled for changes in the size of household over this period. Presumably, single-parent and unattached individuals have grown over this time period. On the other hand, just how one would ‘control’ for that seems quite value-laden and not at all clear to me, as a smaller household may need less income, but it’s unclear just how much less income will give it the same quality of life.

  5. Hello Miles,
    Though not the main point of evidence in your post, a point I am curious about is hours worked: would it not be better for comparative hours worked to be expressed in terms of hours worked per capita for the working age population? Yet I rarely if ever see the data analyzed that way. (Of course one then has to pick an age group for “working age”.)

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