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EDITOR’S NOTE: This first essay in a new series from the Macdonald-Laurier Institute will help Canadians better understand exactly what the circumstances of Canada’s middle class are and the exact extent to which it can be said to be “struggling.”
By Sean Speer
and Brian Lee Crowley
OTTAWA, Ont. Dec 7, 2015/ Troy Media/ – Concerns about a perception of income inequality have been an animating issue in Canada’s policy discourse for several years. According to the Canadian Centre for Policy Alternatives, wealth and income inequality are “on the rise” (2013) and “one of the biggest challenges of our time” (2015).
These perceptions of a stagnant middle class and a growing disparity between wealthy Canadians and the rest of the citizenry are a major part of the Trudeau government’s agenda in general and its focus on bolstering the country’s middle class in particular.
While these claims seem to have considerable political cachet, the so-called “growing gap” is not to be found in the Canadian statistics. Thus, the risk is that our policy debate imports data and the experience from the U.S. – where such a gap does exist – and is focused on policies to counteract a trend that is not pertinent, or at the very least less pronounced, in Canada.
The federal government creates many of the most important conditions for social mobility – that is, the circumstances for individuals to climb the socio-economic ladder. Robust social mobility is one of the empirical measures of a society’s economic and social vitality. And the Trudeau government ought to be credited for its focus on inclusive economic growth.
But a recurring theme of the Liberals’ election campaign was the need for public policy to be soundly rooted in the available evidence. Policies in pursuit of an inclusive growth agenda should be no exception. The government needs to ensure that it has a good understanding of the current state-of-play here in Canada before determining what policy actions should be undertaken to bolster economic opportunity and middle-class wage growth.
As Jason Clemens, writing for the Macdonald-Laurier Institute, put it: “Inequality is terribly complicated and simplistic diagnoses risk worsening the problem.” This risk is exacerbated by the already-noted tendency to conflate the Canadian experience with that of the United States. It is incumbent on the Trudeau government – which has frequently cited the perceived inequality gap as a motivating issue – to understand these nuances before setting a policy course for the future.
The measurement of income inequality is fraught with challenges. These limitations can leave policy-makers with an incomplete picture of the socio-economic landscape.
One measurement challenge is the tendency to overlook the equalizing effect of the tax and transfer systems. One of the principal aims of the tax and transfer systems is to provide for redistribution among income groups. A recent study published by the Macdonald-Laurier Institute finds that the transfer system has a “substantial impact on the distribution of total incomes” (Cross 2015). In particular, it finds that the net effect of the tax and transfer systems is to boost low incomes by 50.6 per cent and reduce the highest incomes by 19.1 per cent. This evidence that Canada’s current system is highly progressive must be part of any discussions about income inequality and what, if any, further steps should be taken to counteract the perceived gap.
Another major challenge is the tendency to rely on a snapshot of income and wealth distribution and, in so doing, fail to account for changes over an individual’s life. This methodology provides a stationary window into an individual’s earnings and wealth accumulation. The problem is that this static analysis fails to account for social or economic dynamism and the extent to which individuals’ economic circumstances change markedly over time.
A 2012 study, which used Statistics Canada data to track a sample of a million Canadians to see how their income changed over time, found clear evidence of social mobility over the lifecycle (Lammam, Karabegovic, and Veldhuis). The study put individual tax filers into five income groups from lowest to highest income, with each group representing 20 per cent of the total. In 1990, the lowest 20 per cent of income earners had an average income of $6,000 (2009 dollars). By 2009, the last year for which the study produced data, 87 per cent of those in the bottom income group had moved to a higher group and their average income climbed by 635 per cent to $44,100. Put differently, almost nine of 10 Canadians who started in the bottom 20 per cent had moved out of low income over this 20-year period.
And the upward climb was matched by a shift downward by some. Among those initially in the highest income group in 1990, 36 per cent moved to a lower income group by 2009. The average income of those originally in the highest 20 per cent of income earners in 1990 increased by only 23 per cent from $77,200 to $94,900 by 2009.
This degree of socio-economic dynamism is a reflection of Canada’s culture of equality of opportunity. Consider, for instance, that the Trudeau government has a Cabinet minister who moved here from Afghanistan as a refugee less than 20 years ago. It is a phenomenon that ought to be celebrated. The story is even more pronounced when one considers our experience relative to that of the United States.
A major source of confusion with respect to perceptions of income stagnation in Canada is the incomparable experience of the United States. Canada has exhibited much higher levels of social mobility and middle-class wage growth in recent years. Yet there is a tendency to draw conclusions based on the negative U.S. experience. As one prominent think-tank scholar has put it: “the dismal U.S. headlines do not reflect Canadian reality” (Yakabuski 2013).
A 2014 New York Times project sought to measure middle-class income growth among industrialized nations over a 30-year period from 1980 to 2010). Its findings were illuminating. At the outset, the American middle class (defined as families earning between $35,000 and $100,000 a year) had higher incomes than their counterparts almost anywhere in the world. But low- and middle-income earners in the U.S. experienced slower income growth over the ensuing period relative to those in other advanced economies and the size of its middle class shrank by about two percentage points.
The data show a different experience in Canada. While median income per capita was virtually unchanged in the U.S. from 2000 to 2010, it rose 19.7 per cent in Canada over this period. In fact, by 2010, Canada’s median income matched that of the U.S. and, since then, other data suggest that Canada has moved ahead. The size of Canada’s middle class (using the New York Times definition) stayed remarkably constant over this period at roughly 43 per cent of households.
A separate study comparing Canada and the United States, published in 2012, examined middle-class household incomes in the two countries dating back to the mid-1970s and found what the authors called “a tale of two countries” (TD Economics). Canada’s median household income lagged the U.S.for the most of the past 20 years. The gap reached its peak in 1998, when median household income in the U.S. was 10 per cent higher than in Canada. But thereafter middle-class incomes stagnated in the U.S., while they experienced a solid pace of growth here. The result is that not only has Canada erased the 20-year gap, it created a 9 per cent income advantage by 2010.
The general trend line relative to the U.S. continues to look positive. Recent analysis by University of Laval economist Stephen Gordon shows that Canadian real wages are growing faster than in the United States. And this recent experience is hardly new. Real wages for Canadian workers have been growing faster than those of U.S. workers for more than 10 years. Indeed, since the mid-1990s, Canadian workers have experienced rising wages broadly aligned with productivity growth in large part due to persistent labour demand (TD Economics 2012). Strong labour demand is bound to remain a reality and should serve as a driver of household income growth in Canada.
A study by two former Statistics Canada economists largely reinforces this assessment of Canada’s middle-class health (Cross and Sheikh 2015). The study finds that most middle-class outcomes continue to improve in absolute terms. To the extent that there is a policy issue, it relates to a low-skilled subsection of the middle class the paper’s authors refer to as the “working class.” They argue that a broad concern for the middle class is unjustified and may risk diverting government resources from better targeting them to low-income families.
Overall, then, Canada’s experience with middle-class wage growth ought to be seen as generally positive. As columnist Andrew Coyne (2014) puts it:
Not only are Canadian middle class incomes among the highest in the world, but so is their rate of growth: up 20 per cent, after, inflation, in the decade after 2000, allowing us to catch and pass first Germany and now the United States. This isn’t just a story of an American decline, in other words. It is a story of Canadian success.
Yet, despite Canada’s divergent experience, political commentary from the U.S. has come to colour our policy debate and created a false – or at least incomplete – picture of the state of the Canadian middle class.
Notwithstanding public perceptions and campaign rhetoric, the data show strong evidence of social mobility and middle-class income growth relative to the United States. These are developments of which Canadians ought to be proud. Canada has long been a refuge for those seeking economic opportunity.
The upshot of the data is that the Trudeau government inherits an economy in which social mobility and middle-class wages are generally moving in the right direction. The fact is that Canada’s middle class has never been as well off in our history. Using any yardstick – including median incomes, real wages, or household net worth – the evidence finds that Canada’s middle class is experiencing income growth and wealth accumulation.
The question, then, for the Trudeau government is how to avoid the worrying trend in the U.S. and to ensure that Canada continues to exhibit middle-class wage growth in particular and inclusive economic growth in general.
While the data show that concerns about Canada’s middle class are overstated, the goal of growing middle-class incomes is still a worthwhile objective. Rising living standards for all Canadians ought to be among any Trudeau government’s top priorities just as it was for Laurier.
A policy agenda to achieve this objective ought to focus on encouraging more opportunity and social mobility and greater overall wealth rather than equalizing outcomes through more redistribution. That is, the goal should be to help low- and middle-income earners climb the socio-economic ladder instead of bringing high-income Canadians down a few pegs. Such an agenda would represent a true vision of inclusive growth.
The Trudeau government has put forward several policy proposals to help achieve this objective. Many of them will help to create the conditions for economic activity and middle-class wage growth. Its proposals to lower middle-class tax rates, to expand means-tested post-secondary grants, to provide generous child benefits, and to increase financial support for public infrastructure, in particular, will be useful for Canada’s middle class.
But there is more the government can do to deliver on this overarching policy objective. Here are some preliminary recommendations.
The Trudeau government has committed to review the plethora of federal tax expenditures with the goal of eliminating redundant and ineffective ones in order to generate fiscal savings. There is a strong case for this type of exercise. The federal government has not undertaken such a systematic review in nearly 30 years. The proliferation of tax expenditures over that period – including credits, deductions, and “special preferences” – has complicated the system, narrowed the tax base, and indirectly increased the size and scope of the federal government (Sheikh 2014). There is also evidence from the U.S. that many of these policies tend to disproportionately benefit high-income earners (Congressional Budget Office 2013). A comprehensive review with the goal of eliminating certain tax expenditures – particularly those which skew to high-income earners – could increase progressivity and create the fiscal room to lower marginal tax rates for low- and middle-class Canadians.
This type of tax reform could be further bolstered by other policies focused on rewarding work and investment while discouraging state dependence. An expansion of the Working Income Tax Benefit (WITB) is a good example. The WITB was created in 2007 to boost the earned income of low-income working individuals and families. The benefit is designed to reduce disincentives for people to enter and remain in the workforce due to the typical claw back of social assistance benefits (what economists call the “welfare wall”) and the costs associated with payroll tax deductions and work-related expenses. Some research shows that there is room to enhance the program, including increasing the maximum benefit and possibly raising the income threshold at which it applies (Battle and Torjman 2012), in order to “help make work pay.”
The Trudeau government has expressed a general predisposition to free trade. This is a positive development that returns the Liberal Party to its Laurier roots. Free trade agreements such as the recently-signed Trans-Pacific Partnership (TPP) ought to increase Canadian trade, productivity, and wages. The government should move forward with TPP’s prompt ratification. Opting not to ratify the agreement would deny Canadian businesses and workers market access to roughly 40 per cent of the global economy and ultimately put us at a competitive disadvantage relative to the U.S. to compete for investment and customers in these growing markets (Burney and Hampson 2015).
There is also much more to be done to reduce trade and economic barriers inside Canada. Interprovincial barriers represent a significant impediment to economic activity within the country. They have real, meaningful implications for middle-class Canadians in the form of higher prices, fewer employment opportunities, and ultimately lower wages. The Macdonald-Laurier Institute has published a series of papers with concrete recommendations to put an end to protectionism inside Canada.1 The federal government has a vital role to play. Rather than continuing to let the provinces take the lead on this perennially disappointing file, the Trudeau government could use its constitutional powers to strike down provincial barriers and to establish an Economic Charter of Rights for Canadians and an Economic Freedom Commission to enforce it. That would be a meaningful reform to improve labour mobility and economic opportunity for low and middle-class workers.
Another important part of domestic and global market access is Canada’s trade infrastructure. The Trudeau government has committed to increasing federal funding for public infrastructure. This increased support can be useful if it targets transportation infrastructure, such as port capacity, critical to moving Canadian products to customers at home and abroad. But this type of investment will be undermined if other government policies make it more difficult to transport and ship Canadian exports. The Trudeau government should therefore reconsider its proposed ban on crude oil tanker traffic on Canada’s West Coast. Even conservative estimates of the 30-year economic benefits of expanded oil shipments from the Pacific coast are significant – with gross national product increasing by $270 billion and labour incomes rising by up to $48 billion over this period (Priddle, John, and Hage 2012). Banning oil tanker traffic – despite evidence that Canada’s record of tanker-based shipping has been responsible – would forfeit these economic opportunities. A plan to strengthen Canada’s public infrastructure ought to be matched with a suite of policies (excluding a moratorium on tanker traffic) that smooth the path for productivity-enhancing investments in pipeline projects.
The last Parliament was marked by a focus on consumer issues and it is likely the Trudeau government will want to develop a plan that speaks to consumer services and cost-of-living issues. Telecommunications policy is a good starting point. The current “fourth-player” policy prioritizes lower consumer prices over other considerations such as capital investment and network quality. This policy objective caused the previous government to intervene in the market in order to subsidize new entrants in the name of lowering prices. Yet research shows that these underlying assumptions may not be right for Canada and may ultimately lead to less investment, poorer quality service, and even higher prices. A more ambitious consumer agenda would involve a neutral pro-competition policy that opened up protected sectors such as telecommunications, banking, and air travel. Well-capitalised competition, based on market forces rather than state intervention, would support capital investment, greater service quality, and ultimately lower prices for consumers. Australia’s experience with using competition rather than heavy-handed regulation to provide greater value for consumers provides a salutary lesson.
The Trudeau government has made housing affordability a top policy priority. There is considerable evidence that homeownership can serve as an escalator to the middle class and that the rising costs of owning a home is becoming a barrier for millennials and aspiring young families (New York Times Editorial Board 2014). Government policy must remember that housing prices are determined by housing supply and demand. But too often the public policy debate about housing affordability is focused on the demand side and ignores housing supply. The goal should be to first eliminate government constraints on housing supply, such as restrictive land-use regulations. Many of these policies tend to fall under provincial and municipal jurisdiction, but the federal government can still play a critical role. The Trudeau government’s infrastructure programme, for instance, offers a golden opportunity to attach strings that reward more intelligent housing policies at lower levels. The second goal should be to develop well-conceived policies to support demand. And most policies to bolster demand are actually the same ones that will promote economic and income growth because a strong economy and growing incomes and personal wealth are ultimately the major drivers of housing demand. A policy agenda that puts homeownership in reach for more middle-class Canadians would help the government achieve its goal of more inclusive growth.
While the Trudeau government has identified middle-class wage growth and “inclusive growth” as its top policy objectives, the key is to ensure that any resultant policy agenda is rooted in the facts of the case and not rhetoric or an incomplete understanding. Relating perceptions about income inequality here by conflating our experience with that of the United States is not the basis for an evidenced-based policy. Instead, it sets up the risk of Canadian policy based on U.S. evidence.
It is important, therefore, that before the government develops its policy programme, it has a firm understanding of the state of Canada’s middle class. Only then can it ensure that its policies are addressing a real problem and doing so in an effective way.
Sean Speer is a Senior Fellow at the Macdonald-Laurier Institute. Brian Lee Crowley has headed up the Macdonald-Laurier Institute (MLI) in Ottawa since its inception in March of 2010.
Battle, Ken, and Sherri Torjman. 2012. Enhancing the Working Income Tax Benefit. Caledon Institute of Social Policy. Available at http://www.caledoninst.org/Publications/Detail/?ID=1001.
Burney, Derek, and Fen Osler Hampson. 2015. “TPP Deal a Clear Win for Canada.” The Globe and Mail, October 5. Available at http://www.theglobeandmail.com/globe-debate/tpp-deal-a-clear-win-for-canada/article26651803/.
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