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.