The Myth of Stagnating Incomes

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Appeared in the Financial Post

It’s hard to blame Canadians for believing the great myth of income stagnation given the continuous stream of reports pointing to the low growth in average incomes over the past several decades.

Others have taken the narrative even further. For example, in his recent Toronto Star op-ed (Canadian middle class left out of the growth equation), Liberal-leadership-hopeful Justin Trudeau claimed: “In the past 30 years, the Canadian economy has more than doubled in size. But unlike times before, virtually all of the benefit of that growth has accrued to a small number of wealthy Canadians.”

Or take the Conference Board of Canada’s recent How Canada Performs report that finds that: “most gains have gone to a very small group of “super-rich,” and “the average income level of the poorest group of people in Canada rose over the time period…but only marginally.”

Thankfully the story of stagnating incomes in Canada is just that, a great fictional tale. The reality is that most Canadians, including those initially in the poorest group, have experienced marked increases in their income over the past two decades.

Using Statistics Canada’s Longitudinal Administrative Databank, a new study, Measuring Income Mobility in Canada tracks a sample of a million Canadians to see how their incomes change over time.

The results are jaw dropping.

In 1990, the lowest 20 per cent of income earners (Canadians were put into five income groups from lowest to highest income with each group containing 20 per cent of the total) earned an average income of just $6,000 in wages and salaries.

By 2009 (the last year for which we have data), 87 per cent of those in the bottom income group moved to a higher group. In other words, almost nine out of 10 Canadians who started in the bottom 20 per cent had moved up and out of the lowest-income category.

Of those from the bottom 20 per cent in 1990 that moved up, an almost equal proportion moved into each of the four higher groups; 21 per cent moved up to the second income group; 24 per cent moved to the third income group; 21 per cent ended in the second highest income group; and 21 per cent of those who began in the bottom income group in 1990 ended up in the top 20 per cent by 2009.

Remarkably, two of every five Canadians in the bottom income group in 1990 ended up in the top 40 per cent of income earners by 2009.

What about the income levels of the poorest individuals that so many of us worry about? The individuals that began the 19-year period in the bottom 20 per cent started with an average income of $6,000 but by the end of the period their incomes had increased to an average $44,100 (see accompanying table).

Clearly the “poor” aren’t getting poorer, they’re getting significantly richer.

And as the table nearby shows, the largest gains in income occurred for the lowest earners, not the “rich.”

Individuals in the top 20 per cent experienced a gain in their average incomes of $17,700 or 23 per cent during this period, which pales in comparison to the $38,100 or 635 per cent increase in the average income of those initially in the bottom income group. Indeed, the dollar income gain by the top 20 per cent was the smallest growth in average income among the five groups.

Perhaps the most powerful conclusion however is with respect to income inequality. Consider that the average income of those initially in the top 20 per cent in 1990 ($77,200) was 13 times that of those initially in the bottom 20 per cent ($6,000). By 2009, those who were initially in the top 20 per cent had an average income ($94,900) that was only twice as high as the income ($44,100) of those who were initially in the bottom 20 per cent in 1990. Put simply, income inequality for the same people decreased, not increased from 1990 to 2009.

Of course this differs significantly from the perception of Occupy protesters and other prominent voices in the income inequality debate. Unfortunately, they wrongly assume that Canadians are permanently stuck in the same income groups year after year. Appropriate measures of income inequality should follow the incomes of specific people rather than compare the average income of different groups of people at different points in time.

Most Canadians start off with a relatively low income because they are young, new to the workforce, and lack work and life experience. Once they acquire education and job-related skills, their income typically increases until it peaks in middle age and then drops again once they pass their peak earning years and prepare for retirement.

The conclusion that Canadian incomes have stagnated and that inequality is on the rise couldn’t be further from the truth and misses one of the great Canadian virtues: we live in a dynamic society where the majority of us experience significant upward income mobility over the course of our lives.

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