Economic Wealth in North America Canada vs. USA

For the majority of the past two decades, there has been a substantial disparity in the median incomes of Canadian and U.S. families. The median household income in the United States was 10% higher than that in Canada at its zenith in 1998 (refer to Chart 1; all income figures in Charts 1-4 are adjusted for inflation, include government transfers, and are prior to taxes). Nevertheless, revenues in the southern region have experienced a gradual decline to a 16-year low in 2011, following two recessions. In contrast, Canada's household income growth has been consistent since 1997, which has not only erased the disparity with the United States but also established a 9% income advantage as of 2010. Despite the 2008 recession's impact, the median household income in Canada is still only 2% below its all-time high.

This note traces the dramatic transformation in the fortunes of Canadian households since the low point in the early 1990s. We then proceed to investigate the distribution of these gains among households at varying income levels. In comparison to the United States, Canada has demonstrated a more favorable performance in terms of income inequality. However, as we have previously noted, there are numerous concerning trends, including the concentration of wealth and income among the nation's wealthiest individuals. Across provinces, there is significant regional variation, with some of these inequality trends being more prevalent than others.

Following the recession of the 1990s, Canada's economic recovery was exceedingly sluggish

The labor market added only 7,600 jobs per month during the first two years of the so-called "jobless recovery." This is a meager figure in comparison to the 2009 economic recovery, which experienced average monthly job gains that were over three times larger (+24,000) during its initial two years (Chart 2). Moreover, the federal government's endeavors to address the nation's structural budget deficit in the 1990s resulted in an anemic growth rate in government disbursements during this period (Chart 3). This exacerbated the already-declining trend in household incomes, particularly for lower and middle-income families, who were both more impacted by the recession and more reliant on government transfers than higher-income families. As a result, the real median household income in Canada decreased by over 13% from 1989 to 1997, and income inequality experienced a significant increase (as we will describe in a subsequent section). The United States was not affected by this. Despite the fact that the U.S. federal government was simultaneously reducing its structural budget deficit, U.S. job and income growth were exceptionally robust throughout the 1990s, in contrast to the Canadian experience (both countries had closed their deficits by 1998). The aforementioned 10% disparity between U.S. and Canadian incomes was ultimately the result of a 2% increase in U.S. real median income during the same eight-year period.

Nevertheless, those tendencies began to reverse by 1998. The United States was the epicenter of two major recessions—the 2001 tech bust and the 2008-2009 financial crisis—while Canada embarked on a period of economic outperformance that has persisted to this day, primarily responsible for the closing of the income gap. Since 1998, Canada has experienced an average nominal GDP growth rate that exceeds that of the United States by approximately half a percentage point. This growth has been facilitated by a surge in commodity prices during the 2000s, as well as substantial increases in residential construction and business investment. These developments have been bolstered by a superior fiscal position and declining interest rates. In 2008, Canada also encountered a more moderate recession, which was followed by a more pronounced recovery in both economic and job growth. Even after more than three years of economic recovery, the U.S. labor market has recovered less than half of the 8.75 million jobs that were lost during the recession.

Income Inequality in the United States and Canada: Maintaining the Status Quo

In contrast, the Canadian labor market experienced a loss of approximately 430,000 jobs from late 2008 to mid-2009, but it has since added over 820,000 positions. Therefore, despite the substantial decline in Canada's GDP, real median household incomes experienced only a minor decline following 2008 and have since stabilized. Between 1998 and 2010, the real median household income in Canada increased by an average of 1.2% annually, while it decreased by 0.1% annually in the United States. The practice of comparing basic income levels between countries when making international comparisons is a murky one due to the fluctuating exchange rates and differences in the cost of living. In order to account for these characteristics, the data can be adjusted to reflect variations in purchasing power. The narrative remains true after this adjustment (Chart 4, above), despite the fact that the income disparity between the United States and Canada reached a much greater 22% by 1998.

However, the U.S. income advantage was eliminated in 2008, and the median household income in Canada has surpassed that of the United States ever since.Canada's provinces cannot be depicted with a single brush, as is frequently the case. Table 1 (right) illustrates the fluctuations in provincial median income since 1976, the initial year for which data were accessible. Alberta, Saskatchewan, and Newfoundland & Labrador have primarily benefited from the commodity growth since the early 2000s as a result of the high concentration of natural resources in those provinces. Simultaneously, the weakness in forestry and manufacturing activity and the high Canadian currency have been a substantial constraint on other regions over the past decade. Since 1998, the median household income in the Prairies has increased by nearly 30% in real terms. Over that 13-year period, incomes in Quebec and Atlantic Canada increased by just under 20%, while Ontario and British Columbia experienced gains of approximately 10% each. Although the tide has indeed elevated all boats, certain provinces possess more luxurious vessels.

Although median income trends are significant, they provide limited insight into the distribution of income throughout society

Income inequality has been a subject of global concern for many years; however, it has become increasingly urgent in the aftermath of the global financial crisis. This is especially true in the United States, where the middle class has been eroded for nearly two decades and the unemployment recovery has been a significant factor. Nevertheless, the issue of income inequality in Canada is somewhat more complex.Economists frequently employ the Gini coefficient to obtain a comprehensive assessment of inequality. This metric evaluates the disparities in incomes within a specific country and produces a single number that can be readily compared across countries and over time. The Gini coefficient is a metric that ranges from 0 to 1. In the event that all individuals in a given country have identical incomes (perfect equality), the Gini coefficient will be 0. In contrast, the Gini coefficient will be 1 if a single individual receives the entirety of a country's national income (perfect inequality).

The Gini coefficient in Canada has never exceeded its counterpart in the United States over the past 35 years (Chart 5). Throughout the 35-year period, inequality in the United States has consistently been higher than that in Canada, and it has actually increased at a quicker pace. Income inequality in Canada has remained essentially stable over the past decade, following a significant increase during the challenging period of the early-to-mid 1990s.The Gini coefficient's sideways trajectory of income inequality may be unexpected to many, particularly in light of the global spotlight on the matter. Charts 6-7 provide insight into the events that have transpired beneath the surface. The upper 20% of households in Canada accounted for the relatively modest real income gains that were observed during the 1980s and for a significant portion of the 1990s. And more recently, the upper end has experienced a robust acceleration in growth, which is partially due to an increase in hiring in the public sector, where wages and benefits have been relatively attractive. However, the income growth rate of the bottom 20% of the income spectrum has been even faster since 1998.