The myth of middle-class stagnation in Canada

It’s hard not to be lulled into believing that middle-class families in Canada have stagnated economically over the past several decades. Google the words “Canada middle class stagnation” and you’ll get nearly half a million results, with headlines like “Middle-class income stagnation, made in Canada.”

Even this year’s federal budget claims that “even though there has been economic growth over the past three decades, it hasn’t much benefitted the middle class.”

Time for a reality check.

It’s true that some data for Canada portend stagnation, or even decline. The inflation-adjusted median income of Canadian families before taxes was 7.0 per cent lower in 2011 than it was in 1976. But statistics, although invaluable, are notorious for their potential to mislead the unwary. Great care must be exercised when assembling, interpreting and drawing conclusions from them.

The statistics that suggest stagnation suffer several problems.

First, instead of looking at pre-tax income, looking at family income after taxes and government transfers (the GST credit and child benefit payments, for example) reveals that, rather than falling by 7.0 per cent between 1976 and 2011, real median income rose by 5.6 per cent. This figure is more indicative of a family’s economic well-being, because what a family ultimately cares about is how much it has available to spend (and save) after paying all taxes and receiving all transfers.

Next, consider the effects of family size. The typical Canadian family is smaller today than in the past, meaning a family’s income is now spread across fewer people. The effect is not trivial. It means that the seemingly meager 5.6 per cent increase in real median family income after taxes and transfers becomes a 30.7 per cent increase per family member.

Finally, consider the distorting effects of over-estimating inflation. The “middle-class stagnation” tale relies partly on the consumer price index (CPI), a common measure of overall price changes, to adjust for infla¬tion. But researchers have found that the CPI erroneously overestimates inflation by about 0.45 percentage points annually.

This error seems small, but over the course of 35 years, its distortion looms large. Adjusting for inflation by correcting this bias, we find that in 2011 median income after taxes and transfers per family member was 52.1 per cent higher than in 1976. This suggests impressive economic improvement—not stagnation—especially when compared to the supposed 7.0 per cent decline noted earlier.

Another way to gauge whether ordinary Canadians are better off today is by calculating how much time a typical worker must work now to earn enough income to buy a variety of goods compared to the past. If the amount of work-time required to buy typical middle-class goods remains unchanged over time, then a conclusion of stagnation is warranted. But if work-time costs have fallen, then a conclusion of stagnation is mistaken.

We compared a wide variety of goods sold in the Sears Canada catalogue in 1976 to the same (or similar) goods sold in 2011. It turns out that the average Canadian wage-earner now has to work a lot fewer hours than in 1976 to earn enough income to buy almost all goods.

For example, in 1976, a microwave cost $579.98. Earning the average hourly wage of $5.30, it took the average Canadian 109 hours of work to buy it. Thirty-five years later, a much better microwave (given improvements in technology) sells for $229.99. At the average hourly wage of $23.30 in 2011, that’s only 10 work-hours.

Similarly, a television in 1976 cost the equivalent of 113 hours of work compared to just 12 work-hours in 2011. A refrigerator in 1976 cost 137 work-hours compared to 22 work-hours in 2011.

These findings further demonstrate that ordinary Canadians have enjoyed significant economic improvement since the mid-1970s. The myth of middle-class stagnation is just that—a myth.