Canada’s middle class: Important factors beyond income tell the true story

David Kilgour

According to a much-quoted report by David Leonhardt recently in the New York Times, median per capita income in 2010 was US$18,700 in the United States, which meant about US$75,000 for a family of four after taxes. This was virtually the same as in 2000 after adjusting for inflation. In Canada, however, after-tax incomes rose about 20 per cent between 2000 and 2010 to an equivalent of US$18,700.

During 2013, this shift in Canada’s favour on real income growth probably increased generally and even more so in our most resource-rich provinces. A regional breakdown of economic performance released by Statistics Canada this week indicated that Newfoundland and Labrador’s GDP grew 7.9 per cent last year, with Saskatchewan growing 4.8 per cent and Alberta 3.9 per cent.

According to the Luxembourg Income Study (LIS) on which the Times story is based, the American middle income community is no longer the world’s wealthiest. The richest Americans still outdo their counterparts elsewhere in income growth, but the middle- and low-income nationals of other advanced economy nations have received larger raises in their real incomes over the past three decades.

The LIS study also indicates that for every income level Canadians have, on a purchasing-power parity basis, outperformed Americans significantly in changes in household income after taxes between 2004 and 2010.

As a result, middle incomes in Canada, which were substantially below those in the U.S. in 2000, now appear to be higher and moving even further ahead. The U.S. economy in recent years grew as fast, or faster, than those of many other nations, but a much smaller percentage of its households benefited than in Canada and Europe. For example, American families in the lowest five percentile saw their incomes decline in 2010, whereas those of the lowest fifth in Canada rose the same year by more than US$ 1000.

The situation of middle-income Americans is becoming more difficult. Thirty-five years ago, an American family of four in the 20th percentile of the income distribution made significantly more than its Canadian counterpart. No longer is this true. The US median family income after taxes in 2010 was up 20 per cent since 1980, but it has remained flat since 2000 after adjusting for inflation.

The change appears to be caused mostly by three factors:

  • While 55-65 year-olds in the U.S. have better literacy, numeracy and technology skills than counterparts in other advanced economy nations, Americans in the 16-24 age range today place well below those in Canada, Australia, Japan and Scandinavia;

  • With more income going disproportionately to those in the higher income brackets in the U.S. and their economic pie not growing as fast as elsewhere, less remains for those further down the ladder;

  • Governments in Canada and Western Europe are much more aggressive in redistributing income in order to raise the after-tax income of middle- and low-income families.

Brandy Zadrozny in the Daily Beast provides an additional focus to the LIS study by pointing at conclusions in a social progress index created by Michael Porter at the Harvard Business School. It looks beyond raw income numbers after tax to measure the overall well-being of residents in 132 surveyed countries.

Using over 50 indicators, such as nourishment, access to water/sanitation, advanced education, life expectancy, green house gas emissions, and personal/political freedom, New Zealand came No. 1; Canada, No. 7 and the U.S., No. 16. The U.S. is still No. 1 in opportunity, but was 31st in meeting basic citizen needs, had a comparatively poor standing in information and communications (only 81% Internet users vs. 87% in Canada), 39th place in primary school enrolment and 70th in health and wellness.

An OECD report came out this week, which concludes that Canada’s top earners have in recent years seen one of the greatest increases in income share of any advanced economy nation. The top one per cent captured about 37 per cent of total income growth in Canada between 1981 and 2010 (the latest year studied), compared to about 47 per cent in the U.S., and more than 20 per cent in Australia and the U.K.

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Unlike the LIS study, this one looks at pre-tax incomes. Its conclusion is that three years ago the top one per cent in Canada (i.e. incomes above C$209,600) obtained 10.6 per cent of total national income, down from a peak of 12.6 per cent in 2006. Both the OECD and IMF, like many of us across Canada and around the world, are concerned about growing income inequality in many countries.

There will be much discussion of the LIS and OECD reports on both sides of the Canada-U.S. border. The methodology and conclusions of both are timely and important. Canada’s income inequality is now among the worst in the developed world – and is widening.

While the income growth might be encouraging, the trend is unlikely to continue unless Canadians expand manufacturing, particularly in the advanced technology sector, invest in innovation and education, and create more opportunities for our youth.

David Kilgour is co-chair of the Canadian Friends of a Democratic Iran and a director of the Washington-based Council for a Community of Democracies (CCD). He is a former MP for both the Conservative and Liberal Parties in the south-east region of Edmonton and has also served as the Secretary of State for Latin America and Africa, Secretary of State for Asia-Pacific and Deputy Speaker of the House.