Research

November 2001

A Good Year Tops Off a Lost Decade:
A Preliminary CCSD Analysis of Income Trends in Canada to 1999

Introduction

On November 6th, Statistics Canada released data on household incomes for 1999 from the Survey of Labour and Income Dynamics, focusing on changes in before- and after-tax family incomes, the contribution of earnings, transfers and taxes to family incomes, trends in the distribution of income between families, and trends in low income. (For extensive data, see Statistics Canada’s Cat. 75-202-XIE, Income in Canada, 1999.)

The purpose of this analysis is to provide an initial overview of the major changes in household incomes, with a particular focus on trends in income inequality and poverty. (While Statistics Canada notes that its low-income lines are not official measures of poverty, the CCSD and many other data users consider persons and families who fall below Statistics Canada’s LICO lines to be poor in the sense of being much worse off than the average, and living in straightened circumstances.)

In this analysis, we look at changes in incomes between 1998 and 1999, and between 1989 and 1999 – a full decade of recession and economic recovery.

Overall, the period from 1989 to 1999 stands as a lost decade in terms of the social progress of Canadians. Income inequality increased, particularly in terms of the distribution of market income – that is, income before the impact of income taxes and government transfers is taken into account. Poverty rose, then fell over this period, but overall, little or no progress was made. Child poverty has increased, even though the 1990s were supposed to be the decade in which poverty among children was to be eliminated.

Key Changes from 1998 to 1999

Market Income

Like 1997 and 1998, 1999 was a year of very strong economic recovery and job growth. Total national income (GDP) – adjusted for inflation – grew by 4.1%, and the number of full-time jobs in Canada rose by 3.3%. Somewhat surprisingly, the average inflation-adjusted market income of families of two persons or more rose by a much more modest 1.4%, to $56,998. (Market income consists mainly of earnings, plus investment income.) The number of good jobs was up, but average earnings seem to have increased much more modestly.

Most families experienced an increase in market income. At first glance, the exception was lone-parent families headed by women, whose average market income actually fell slightly. However, the median income of such families – the market income of a family at the precise midpoint of the income distribution – rose by almost $2,000, from $12,791 to $14,771. This suggests that many women lone parents who previously had no earnings experienced some gains, although their total earnings remained very modest.

Government Transfers

Average government transfers to families fell by 3.3% from 1998 to 1999. This likely reflects the positive impacts of higher employment, with fewer unemployed workers seeking EI or social assistance benefits. However, social assistance benefits also probably fell because of changes to program eligibility and due to inflation. Transfers to families with children fell by a little less than average, reflecting modest improvements to child benefits.

Income Taxes

On average, families paid 2.8% less in income tax in 1999 than they had in 1998, and the average tax rate on families fell from 20.1% to 19.3%. Families and individuals at all income levels benefited from the tax cuts, in the sense of having to pay less – although this fails to take into account any cuts in transfers and public services required to finance those tax cuts. The dollar savings were greatest for those with higher incomes. For both the bottom and top quintiles of families, the income tax rate fell by 0.8 percentage points. This produced savings of $1,201 for the top 20% of families, compared to a savings of $103 for the bottom 20% of families.

Income After Taxes and Transfers

Both the average and median income after taxes and transfers rose for almost all family types between 1998 and 1999, with the exception of lone-parent families led by women. For these families, their median income rose by just $105. Median incomes of two-parent families with children also rose surprisingly little – by $271 or just 0.5%, to $52,018.

Income Inequality

Table 1 shows the share of market income and income after taxes and transfers going to each quintile of both economic families and unattached individuals in 1989, 1998, and 1999. (Each quintile represents 20% of the population, ranked from lowest to highest.)

1989 was the peak year before the 1990s recession, and 1999 was the most recent year of strong economic recovery for which we have data. The change from 1989 to 1999 is thus indicative of the long-term or "structural" trend in incomes.

As shown, the market income share of the highest quintile of both families and unattached individuals rose sharply between 1989 and 1999 – and particularly so after 1994 – while the share of the bottom quintile fell modestly. The ratio of market incomes of the highest to lowest income families widened from 11.0 to 1 in 1989, to 12.7 to 1 by 1999. Put another way, in 1999, the top 20% of families had $12.70 of earnings and investments for every $1 of earnings and investments among the bottom 20%, up from $11.00 in 1989.

Between 1998 and 1999, the market income share of the highest quintile of families (but not unattached individuals) fell. When we look at the decade as a whole, however, the market has delivered greater inequality and larger gaps between families and between individuals. But on a more positive note, the trend to ever-increasing inequality changed in the most recent year examined. The most likely explanation is that as the economic recovery continued, more of the people with precarious employment found regular work, and middle-income workers moved into better-paid and more secure jobs.

Table 1 also shows the share of income after taxes and transfers going to each quintile of families and unattached individuals. This is the “bottom line” of income distribution, the result of government tax and spending measures reshaping the initial distribution of earnings and investment income.

As shown, the share of after-tax income among the top 20% of families fell modestly between 1998 and 1999. Families in the fourth and middle quintiles experienced no change in their share of after-tax income between 1998 and 1999, while those in the bottom and second quintiles experienced a slight increase. Over the whole period from 1989 to 1999, however, the share of after-tax income going to the top quintile of families rose from 37.0% to 38.3%, at the expense of the bottom 60% of families.

It is interesting to speculate what the income figures for 2000 will show. The year 2000 was one of strong economic and job growth, but it may well come to be seen as the last year of the economic recovery which began in 1993. It seems very unlikely that the increase in market income inequality of the 1990s will be reversed.

It is possible, however, that there will be no long-term trend towards increased inequality in the distribution of after-tax and transfer income among all Canadian families over this long period of recession and recovery. If that is the case, it will be because the benefits of job growth during the recovery ultimately outweighed the impact of cuts in government transfers to lower-income families. (Analysis of changes in income distribution also has to take into account many other factors, including changes in the make-up of families.)

Poverty

Table 2 shows the overall rate of poverty in Canada in 1989, 1998 and 1999 as measured by both the before- and after-tax Low Income Cut-offs or LICOs. (In both cases, families or persons below the LICO are spending much more than average on the three essentials of food, clothing and shelter.)

Regardless of the precise measure used, the poverty rate for all persons fell from 1998 to 1999. This should come as no surprise, given the strength of the economy in 1999. More disappointing is the fact that the poverty rate among all Canadians – with the notable exception of seniors – is still much higher than it was in 1989, the peak of the last business cycle.

Table 3 provides further details on child poverty, and the same pattern is evident. Child poverty declined slightly between 1998 and 1999, but it remains higher than it was in 1989, the year the House of Commons pledged to eliminate child poverty in Canada.

Looking at the poverty rates among all households in Table 4, we see that rates have dropped among all economic families and unattached individuals between 1998 and 1999. In both cases, however, the 1999 poverty rates remain above those recorded in 1989. Looking beyond the aggregate figures, we see that two-parent families experienced little change in their poverty rates between 1998 and 1999, but they lost economic ground over the decade.

By contrast, elderly families and lone-parent families saw some improvement. Poverty rates among lone-parent families dropped between 1989 and 1999 – from 49.0% to 46.4% using the pre-tax LICO – and their rate improved substantially from its mid-decade high in 1993. However, the poverty rate among lone-parent families remains unacceptably high.

Table 4 also shows the depth of poverty by family type – that is, the gap between the poverty line and the average income of families or persons below that line. The depth of poverty for all families and for unattached individuals grew between 1989 and 1999, and particularly so for unattached individuals and non-elderly married couples. However, there has been some improvement in reducing the depth of poverty among families with children. Between 1998 and 1999, the largest gains were recorded by two-parent and lone-parent families.

Conclusion

The positive income gains of 1999 are welcome. It appears that the economy improved the incomes of many more families in 1999 than it had in 1997 and 1998. But it is also evident that poverty rates are unlikely to return to their pre-recessionary levels. And data on the number of people who experienced poverty, even during boom periods – an estimated one in four Canadians over the period from 1993 to 1998 – provide an important cautionary note. Economic inequality continues to pose a significant threat to the well-being of a great many Canadians.

Research

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