Real disposable income per capita in Canada is currently $13,000 higher than it was in 1980.
But in the United States, it’s US$25,000 higher, says a report released on Monday by CIBC.
Over the past four decades, average real annual disposable income per capita in Canada has risen by 1.3 per cent, notably slower than the 1.9 per cent growth seen south of the border. On a cumulative basis, that measure in the U.S. rose 40 per cent faster than in Canada, said the report Canada’s Income Problem by economist Benjamin Tal.
“Even putting aside the fluctuations of the Canadian dollar, the U.S.-Canada personal disposable income per capita gap has widened by an inflation adjusted 48 per cent since 1980. One-quarter of that widening in the gap was due to faster growth in taxes and other transfers to governments in Canada. Zooming in on gross personal income, just under one half of the widening in the gap is due to lower growth in rental and interest/dividend income in Canada, as well as faster growth in government transfers in the U.S. The rest is due to lower growth in labour income in Canada – all of which is due to a combination of slower wage growth and less favourable composition of job creation in Canada,” said the report.
The report said the 1980s and its double dip recession saw U.S. income growth outpace Canada’s by close to 0.7 per cent per year. But the real breakaway occurred in the 1990s, as the jobless recovery in Canada resulted in a dramatic widening in the gap, with the U.S. outpacing Canada by an inflation-adjusted 1.5 per cent per year during that decade.
The 2000s started with relative stability in the gap, with income in both countries rising roughly at the same rate. But by the latter half of the decade, Canada started to make its move, and the gap began to narrow. That trend was helped tremendously by the impact of the Great Recession on income growth in the U.S. (and the fact that Canada was only a second-hand smoker in terms of economic downturn).
But by 2010, as the U.S. labour market started to recover, Canada’s outperformance came to an end.
“From this, we learn that over the past four decades, income growth in Canada was able to outpace growth in the U.S., on a sustainable basis, only 15 per cent of the time – and even that outperformance was helped notably by the fact that the U.S. went through its worst recession since the Great Depression. We also can say that the U.S.’s recovery since 2010, which saw the U.S.-Canada income gap widen by eight per cent, almost completely erased Canada’s gains made since the latter part of the 2000s. This means that the gap generated in the 1980s and further in the 1990s remains intact,” said the report.
To what extent did taxes and other transfers to governments account for the rising income gap?
“For obvious reasons, that component in Canada is much larger, accounting for more than 30 per cent of gross income versus 10 per cent in the U.S. … growth in gross income in the U.S. rose roughly at the same rate as net income. At the same time, in Canada, net income rose more slowly. We estimate that the impact of faster rising taxes and other transfers to governments (such as Canada Pension Plan) in Canada have accounted for close to one-quarter of the widening in the gap since 19801,” added the report.