Who belongs to Canada's middle class? - Macleans.ca

Who belongs to Canada’s middle class?

That depends on how you define the Canadian dream

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In an 1858 editorial in the Brooklyn Daily Times, Walt Whitman declared “The most valuable class in any community is the middle class, men of moderate means, living, say, at the rate of a thousand dollars a year or thereabouts.”

At the time $1,000 a year was considered to be the income cut-off that separated those who toiled in manual labour, earning just enough to survive, from skilled workers in the cities who represented the engines of economic growth. Since then, of course, most Western societies have progressed from an industrial economy to one driven by services and populated largely by a middle class that, many believe, is being left behind.

This has become a popular theme for federal Liberal leader Justin Trudeau, who has made the plight of the Canadian middle class the cornerstone of his campaign messaging ahead of next year’s federal election.

Exactly how well the Canadian middle class is doing is a matter of much debate. (Maclean’s has covered it extensively, including here and here and here.) But underlying that discussion is a deeper debate over exactly how to measure the middle class itself. And that has proven to be much harder today than it was for Whitman back in 1858.

On a global scale researchers generally define the middle class as the segment of society that earns between $10 and $100 a day. By that measure most Canadians are, at the very least, comfortably middle class. But being middle class in New Delhi is not the same thing as being middle class in Winnipeg. In the 1980s, MIT political economist Lester Thurow defined the American middle class as those who earned between 75 per cent and 125 per cent of the median income, which in Canada would mean families earning between $35,000 and $70,000 a year.

By that measure fewer than a quarter of Canadians are actually middle class, a proportion that has fallen from 31 per cent in the mid-70s. (By contrast, the number of Canadian families earning above that threshold has grown from 33 per cent in 1976 to 35 per cent in 2011, while the number who fall below it has jumped from 36 per cent to 40 per cent.)

Last year, William Galston, a former advisor President Bill Clinton and senior fellow at the Brookings Institution, updated the definition of middle class to include anyone making between two-thirds and twice the median income. In Canada, that encompasses families who earn between $32,000 and $95,000 a year. Even then, it represents just 40 per cent of Canadians.

Others who study the middle class have instead turned to a more consumer-oriented definition that focuses less on what the middle class earns than on how it spends its money.

Diana Farrell, managing director McKinsey and Company and former deputy director of President Barack Obama’s National Economic Council, has estimated that families could be considered middle class if they had at least a third of their income left over after paying for necessities like food, shelter and clothing. This leftover cash is referred to as “discretionary income” since families can choose how to spend or save the cash.

Scanning through Statistics Canada’s Survey of Household spending, it’s possible to sort out, broadly, how much Canadians spend on the essential items — food, shelter, clothes, taxes and other basic living costs — compared to non-essentials such as cars, phones and retirement savings. (Many people would argue that these are also essential expenses, another reason why it’s so tricky to measure the middle class.)

By Farrell’s measure, the minimum household income to qualify as middle class in Canada would be around $36,000 a year, since that’s the point at which households report having at least a third of their income left over for discretionary spending. In that case, the vast majority of Canadians are, in fact, middle class and that proportion has been holding steady for some time.

But perhaps the most accurate measure of the state of today’s middle class is one that Statistics Canada touched on more than two decades ago. In 1991, the agency staged its own attempt to gauge the number of Canadians who had significant discretionary income. Unlike Farrell’s income cut-off, Statistics Canada defined discretionary income as “the amount of money which would permit a family to maintain a living standard comfortably higher than the average for similar families.” In other words, the number of Canadians who were succeeding at keeping up with the Joneses.

It considered Canadians with discretionary income to be only those families who spent at least 30 per cent more than their friends and neighbours on non-essential items such as “vintage wines, stocks and bonds, [and] vacations.”

Using data from 1986, it discovered that the typical “discretionary income family” turned out to be the classic yuppies. They were married couples earning two incomes who owned a house and two cars, lived in or near a large city, ate out regularly at nice restaurants, took plenty of vacations, bought nice clothes, spent freely on alcohol, home renovations and new furniture, gave money to charity and still had enough left over for an RRSP.

Back then very few Canadian families actually looked like this— just a quarter of Canadian households met the discretionary income threshold. Statistics Canada determined that total discretionary income in Canada amounted to less than $29 billion, a significant sum, but hardly an engine of economic growth. But, the study noted at the time, marketers were keen to pitch their products to this small swath of the population since they held the keys to a lucrative pile of “spare cash.”

Flash forward more than 20 years and that definition of “discretionary income” looks suspiciously like the present day middle class ideal: A family who owns a house and a car (or two), lives near a big city, likes the occasional visit to a restaurant and trip to Disneyland, with enough left over to renovate the kitchen.

Statistics Canada hasn’t done any recent follow up studies looking at how many Canadians qualify as actually having discretionary income these days. But the 1990s were particularly hard on the average Canadian household. Incomes have been recovering since then, although the median income is still below where it was in the 1970s, in relative terms.

In the meantime, that romantic notion of “discretionary income” seems to have taken hold of a far larger segment of Canadians than the 25 per cent who were actually able to afford it back in the ‘80s. Cheap and abundant credit has helped an ever-larger share of Canadians gain membership to what was once a fairly exclusive club of those who actually had enough spare cash for the fun things in life. The fear now is that the days of artificial “discretionary income” might be coming to an end and the middle class will be faced with the reality that it was never really part of the elite world of Caribbean cruises, Ikea bathrooms and two-car garages.

This might be one reason why the Trudeau Liberals are so keen to shift the campaign rhetoric away from the stale political mantra of “working families.” They sound too much like the “men of moderate means” of Whitman’s 19th century Brooklyn than the purchasers of “vintage wines, stocks and bonds, and vacations” who make up today’s aspiring middle class.

What should matter most these days to anyone concerned about the plight of the Canadian middle class isn’t necessarily median income — or even income growth — but what’s happening to the piece of the pie left over after all the bills are paid. It’s here in the margins of “discretionary income” where today’s middle class dream lives or dies.