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The Myth of Stagnating Incomes

By Niels Veldhuis and Charles Lammam Created: November 27, 2012 Last Updated: November 27, 2012
Related articles: Opinion » Viewpoints
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It’s hard to blame Canadians for believing the great myth of income stagnation given the continuous stream of reports pointing to the low growth in average incomes over the past several decades.

Thankfully, the story of stagnating incomes in Canada is just a fictional tale. The reality is that most Canadians, including those initially among the lowest income earners, have experienced marked increases in their income over the past two decades.

Clearly, the “poor” aren’t getting poorer; they’re getting significantly richer.

Using Statistics Canada’s Longitudinal Administrative Databank, a new study, Measuring Income Mobility in Canada, tracks a sample of a million Canadians to see how their incomes change over time.

The results are jaw dropping.

In 1990, the lowest 20 percent of income earners (Canadians were put into five income groups from lowest to highest income, with each group containing 20 percent of the total) earned an average income of just $6,000 in wages and salaries.

By 2009 (the last year for which we have data), 87 percent of those in the bottom income group moved to a higher group. In other words, almost nine out of 10 Canadians who started in the bottom 20 percent had moved out of low income.

Of those from the bottom 20 percent in 1990 that moved up, an almost equal proportion moved into each of the four higher groups; 21 percent moved up to the second income group; 24 percent moved to the third income group; 21 percent ended in the second-highest income group; and 21 percent of those who began in the bottom income group in 1990 ended up in the top 20 percent by 2009.

What about the income levels of the poorest individuals that so many of us worry about? The individuals that began the 19-year period in the bottom 20 percent started with an average income of $6,000, but by the end of the period their incomes had increased to an average of $44,100.

Clearly the “poor” aren’t getting poorer; they’re getting significantly richer. And, the largest gains in income occurred for the lowest earners, not the “rich.”

Individuals in the top 20 percent experienced a gain in their average incomes of $17,700 or 23 percent during this period, which pales in comparison to the $38,100 or 635 percent increase in the average income of those initially in the bottom income group.

Perhaps the most powerful conclusion, however, is with respect to income inequality. Consider that the average income of those initially in the top 20 percent in 1990 ($77,200) was 13 times that of those initially in the bottom 20 percent ($6,000). By 2009, those who were initially in the top 20 percent had an average income ($94,900) that was only twice as high as the income ($44,100) of those who were initially in the bottom 20 percent in 1990. Income inequality for the same people decreased, not increased, from 1990 to 2009.

Of course, this differs significantly from the perception of Occupy protesters and other prominent voices in the income inequality debate. Unfortunately, they wrongly assume that Canadians are permanently stuck in the same income groups year after year. Appropriate measures of income inequality should follow the incomes of specific people rather than compare the average income of different groups of people at different points in time.

Most Canadians start off with a relatively low income because they are young, new to the workforce, and lack work and life experience. Once they acquire education and job-related skills, their income typically increases until it peaks in middle age and then drops again once they pass their peak earning years and prepare for retirement.

The conclusion that Canadian incomes have stagnated and that inequality is on the rise couldn’t be further from the truth and misses one of the great Canadian virtues: We live in a dynamic society where the majority of us experience significant upward income mobility over the course of our lives.

Niels Veldhuis and Charles Lammam are economists at the Fraser Institute and co-authors of the recently released “Measuring Income Mobility in Canada,” available at www.fraserinstitute.org

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