By Charles Lammam
and Hugh MacIntyre
The Fraser Institute
Billed as a pre-budget briefing, federal minister and well-regarded economist Jean-Yves Duclos recently gave a high profile presentation on the purported worrisome state of Canada’s middle class. One can only surmise the government is trying to create angst among Canadians to justify policy choices taken in the upcoming federal budget.
The reality is very different from the misleading picture painted by Duclos. Far from stagnating or falling behind, Canada’s middle class is actually doing much better relative to past decades based on a host of indicators.
Duclos nonetheless claims median income – the income level where half the population has higher and the other half has lower income – has been stagnating, despite the fact that his own chart shows median income rising since the mid-1990s.
In general, however, claims that Canada’s middle class is stagnating – or worse, falling behind – are based on incomplete analyses.
First, they tend to examine income before taxes and government transfers (the GST credit, child benefit payments, etc.), failing to account for important changes in taxes and government transfers over time. What ultimately matters is how much a family has available to spend (and to save) after it has paid all taxes and received all transfers.
Second, too often analyses fail to account for the fact that the average family is smaller today than in the past. This matters because it means a family’s income now spreads across fewer people. Any measure of economic well-being should account for the resources available to each family member.
Finally, there’s a well-documented problem with the standard measure of inflation, which overestimates the increase in overall prices. Using the standard measure to adjust for inflation will understate the real value of current income relative to past income and give the appearance that median income is increasing less than it actually is.
After accounting for all these considerations, a recent Fraser Institute study found that median income in Canada has in fact increased by 52 percent since the mid-1970s. This pronounced growth can hardly be described as stagnation.
Duclos makes another puzzling claim – that costs for essentials are increasing. This overlooks the reality that spending on household necessities (food, clothing and housing) has fallen as a share of the average family’s income over the past half century. Specifically, the average Canadian family now spends 38 percent of its income on necessities, down from 56 percent in 1961. While more of the average family’s budget is consumed by a larger tax bill, the declining share spent on necessities is a sign of economic improvement.
Or look at it another way. The average Canadian worker now works a lot fewer hours to purchase common household items, many of which have dramatically improved in quality. For example, in 1976, a Canadian earning the average hourly wage had to work 109 hours to buy a microwave. Today, a much better microwave (given improvements in technology) costs only 10 work-hours. Similarly, a colour television used to cost the equivalent of 113 hours of work compared to just 12 work-hours now for a much sleeker TV with the same screen size. And the list goes on.
But there’s perhaps no better indication of economic progress than the significant economic mobility enjoyed by the vast majority of low-income Canadians who over time rise up the income ladder, enjoying marked gains in economic well-being.
Despite the doom and gloom rhetoric, and misleading claims by Minister Duclos, Canada’s middle class is doing better today. Yet this progress may be threatened by government policies aimed at curing a disease that doesn’t exist.
Charles Lammam is director of fiscal studies and Hugh MacIntyre is a policy analyst at the Fraser Institute.