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Middle-class incomes and the apples-to-apples problem

The typical Canadian household isn’t what it used to be, says Mike Moffatt


 

EJP Photo/Compfight

If the last few months are any indication, the stagnant incomes of the middle-class will be the defining economic issue of the decade.  My economist colleagues Stephen Gordon and Kevin Milligan have provided thoughts and useful data on the topic; I highly recommend reading their pieces. This topic is incredibly complicated, so I anticipate and look forward to hearing the perspectives of other experts.

The federal government has to be one of the most important voices in the discussion. In July, Jason Fekete of the National Post, reported that the Department of Finance prepared a presentation to the Minister titled The Economic and Financial Situation of the Canadian Middle Class. Until now, the PowerPoint slides were not available to the general public, but I managed to obtain a copy (opens Scribd, or see embedded document below) the old fashioned way, by asking the Finance Department.

Of all the arguments made in the presentation, the most important, in my view, is the one on the changing composition of families. In 1976, only 40 per cent of families were either elderly or had a single head of household. That number has grown to 57 per cent in 2010. This affects the calculation of median incomes, as households with one adult should, on average, earn less than households with two. Similarly, you would expect that households with members outside of the working age would earn less than households with working age members. The report finds that adjusting for these factors makes the median household income picture less bleak.

I believe these kinds of adjustments are vital in understanding the extent of the issue. But not all adjustments improve the outlook for the middle-class. Another adjustment we need to consider is that the median household is far more educated than it was in 1976. This reduces the number of working years for the average Canadian, as they are entering the workforce at 23 or 24 instead of 18 or 19, so there are four years of lost income. There are also all the added financial expenses of post-secondary education that need to be accounted for.  If, for example, it takes a university education for a male to earn $40,000 in 2010, but he could have earned the same income with a highschool education in 1976, then clearly males are worse off, even if income levels are unchanged.

Even if we could control for every factor that might skew our income calculations, that is still not enough. What ultimately matters is not income but welfare. The ultimate goal of public policy should be to improve the quality of life for Canadians. There is a correlation between income and welfare, but it is far from perfect. For instance, there are fewer members of the middle-class that are addicted to cigarettes today than there was in 1976. This is a good thing. However, there may be factors unrelated to income that have caused a decline in quality of life. I suspect debt level fears and fears of not saving enough for retirement have moved in the opposite direction. A middle-class policy agenda that over-focuses on income may miss opportunities to improve the quality of life for middle-class Canadians.


 

Middle-class incomes and the apples-to-apples problem

  1. “Lies, damned lies, and statistics” :-)

  2. Ok, I’m not an expert by any means but isn’t the problem for the middle class the cost of living? i.e – what those incomes can buy in 2013 is not what they could by in 2000.

    To me comparing incomes to incomes without any info on how the cost of living has changed is pointless. Just the cost of buying an home has increased greatly over the past 15 years which directly reflects the amount of disposable income a family has to spend making it more difficult to live with the same standards they lived with 15 years ago.

    • Isn’t just homes. Take cars, same model/options in 2000 say is $21k, today the same car/model is $41k. Almost double!

      Government lies about inflation. Doesn’t mater if you use the BoC inflation calculator for gold, model-T, homes, or whatever, all big items tap out the middle class. http://www.bankofcanada.ca/rates/related/inflation-calculator/

      Parents bought a home in Toronto for $14,800 in 1968 should be $97,350 but it isn’t, closer to $700,000 is reality. Its why I often chirp about StatCan lies to Canadians, as we all don’t live on banana’s and KD alone.

      Easy reason governemtn lies about inflation is tax table creep. If they increase base deductions by 1% but real inflation is 5%, they in fact get a compounding tax table creep of 4% a year. So much tax table creap it has gone form the top 4% paying tax to today where you can have poverty level wages and pay income tax.

      Governemtn loves deceiving the people, it hides their bloat. But now the bubble has popped. Japans money print for debt caused Japan’s lost decades where middle class has lost 50% of their standard of living, it is coming to Canada….even more so now that we run governemtn on debt and electronic counterfeit money.

      • It is not that governments lie about inflation; inflation is not so neatly tabulated as one would wish for.

        Statistics only tell part of a story, a momentary picture of sorts, artificially tabulated. But life goes on, regardless of what inflation numbers tell us. That is the tricky part, to live within one’s means. Inflation or not, it does not really matter when the daily costs are added up. Choices have to be made on a personal level and whoever is able to make good choices usually is capable of making ends meet.

        Everyone can only spend that dollar once.

  3. What about the dramatic increase in the number of dual-income families over the past few decades?

    • I’m not sure about Canadian data, but the labour force employment rate in the US is back to levels last seen in the early 80’s. So I’m not sure that cancels out income stagnation. And with a high divorce rate, I’m not sure how many of those dual income families stay dual income.

      • Average USA household income is down 40% from 2005/6 levels. Canada too was hit, I suspect (but conjecture) it was about 28%. Canada isn’t as forthcoming as US government site is. As Ottawa is about BSing us.

        Scary statistic too. And why the middle class is dying. Taxes kill them, then the bad economy kills them as far too many resources are being consumed by statism governemtn greed.

        We are even lied too by governments and banks, the depression started in 2006 when Bernanke, Carney and others dropped interest rates but should have raised them. By electronic counterfeiting no value money (aka printing money) to buy governemtn debt at 1% rates they stalled the economy via inflation and currency depreciation.

        http://www.xe.com/currencycharts/?from=USD&to=CNY&view=10Y

        Its a massive lie to the people, a huge pyramid debt ponzi scheme by our own bloated corrupt bailout buddy governments. Me, I saw this coming so I was in cash for the 2007/8 crash and bough stocks cheap in early 2009….I made money by seeing the reality of our corrupt governments botch job on currency and the economy.

        And we are about due for round too, as I am back into cash. As they say, “Play it again Sam”….might get two lucky investment events in one lifetime.

        ,

      • Very good point. Divorce is another factor which plays a role.

    • Yep, people work harder and get less, needing the second job.

      I was taxed so much I told my wife work is optional and I prefer you not work for 40 cents on the dollar. As you will be taxed like slave and I lose the deduction. That unless she made $60k or more, no work for her.

      • I don’t believe that many people need a second job. It is much more a matter of being able to make good choices when spending that dollar and not wanting everything.

        No one has the right to have it all. Choices need to be made by most of us. Even the very rich need to make choices. After a while, even $50,000 @ month to spend becomes tight when one becomes used to paying for the high item tickets one gets used to at that sort of income and spending level.

        It may seem on the outside that rich people do not have to make choices but that is a false understanding of how humans are. One does get used to buying expensive items when one has that sort of money, and so after a while even that money is not enough to buy or consume what one really wants and so forth. It’s all a human problem. Nothing more and nothing less. And it will never change as long as we stay human.

      • That’s a silly reason not to work, she is now 100 percent financially dependent on you for life. If you ever divorced you would pay spousal for life for encouraging her to be that way. Your spousal deduction is peanuts.

  4. Does highlight government lies about inflations and wages. And what matters is net after tax income and spending power. Yes, if you have to pay a 234% premium on cheese, CRTC cartel pricing in cell, cable etc., and more for autos, more for insurances, 50% of the cost of a house goes to taxes….raising the cost of living so high….tax as inflation…..

    The middle class is dying. Not enough disposable income left after mortgage, taxes, and spend side taxes including tax as inflation that there isn’t enough left to drive discretionary spending for local jobs.

    The myth: governments create jobs.

    The truth: Government can tax income/jobs out of people and inefficiently reallocate them with a consumptive costs.

    Reality is the middle class is shrinking. Too many parasites in their wallet.

  5. What I am about to say will be heavily criticized (but I’m used to that by now!): university is not for everyone! Too much emphasis is placed on the so-called need for a university education. But the problem with university schooling, for most, is that those studies are too theoretical in nature for finding the jobs which are out there.

    None of my adult children has a university degree but some of their close cousins and friends do. Some of my children have college education which is much more driven toward practical ends and needs. One of my children has only a high school diploma and runs his own successful business. All of my children do just as good, financially and personally as do the cousins and friends who did attend university. None of my kids were saddled with a huge education debt; my kids could enter the housing market early because of no other debts, and my kids have all found work in which they could progress through their work – learning as they go so to speak.

    Why the emphasis always on university education? Why the artificial directions laid out? There are so many options in life without the need for a university education, but when the push is for university, then those other directions are not being looked at seriously enough.

    What is wrong with the trades? We don’t have enough people working in them. Why is that? Being in the trades makes good money, too. Sometimes I feel that the trades have become a dirty word, as if working as an electrician or carpenter or what have you, is no longer valued enough. But those trades can be life satisfying occupations and we should not dismiss the trades so easily. That is doing a disservice to our up and coming generations, or, in other words: our up and coming middle class.

  6. Two earner’s income. Who has time to cook meals? How much money is spent on take out meals, and restaurant meals, extra cars and wardrobes and daycare costs, and what, ultimately, does a second income earner with small children, bring home in earning minus all the extra cost and taxes in order to make it worth while?

    Preparing meals from scratch saves a lot of money for a family of five. But when there is no time to prepare meals because everyone is always too busy, then the costs for food rises considerable for middle income families.

    Statistics are one thing, but real life tells a different story most often. We need to come back to reality and look at the so-called neatly arranged statistics a bit less. Use common sense more often – it works wonders.

  7. Good points.

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