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Consumer Trends Report – Chapter 5: Consumer Income

Chapter 5 – Consumer Income

Income – that is, after-tax income – is a critical element in the ability of Canadians to participate in the marketplace. Income is required to purchase goods and services – those necessary for survival and those that make life more enjoyable. How Canadians interact in the marketplace, therefore, greatly depends on their financial resources.

The general performance of the economy – especially the labour market – is a major determinant of the income received by Canadian families. In fact, the main source of income for Canadians is labour market earnings, which in the aggregate accounted for 77.9 percent of total income in 2001. 168 Other sources of income include privately held investments (3.5 percent of total income in 2001), private retirement income (5.7 percent) and federally and provincially administered transfer programs (11.2 percent). 169

Income concepts

Market income and after-tax income are related by the following equation:

Market income + government transfers – income taxes = After-tax income

Market income comprises four categories:

  • earnings: wages and salaries and self-employment income;
  • retirement income: from private sources (primarily employer pension plans);
  • investment income: includes dividends, net rental income, etc., but excludes capital gains from the sale of an asset; and
  • other income: includes support payments, severance pay, etc.

Government transfers comprise two categories:

  • federal transfers: includes CPP, EI benefits, etc.
  • provincial transfers: includes social assistance, provincial tax credits, etc.

While poorer Canadians are understandably concerned about their income levels, public opinion research suggests that many middle- and even upper-income Canadian families are too. For example, a 2002 survey revealed that 41 percent of Canadians with a household income of between $40 000 and $60 000 reported being "very concerned" about having sufficient money "to purchase food necessary for a basic and balanced diet," and close to half (45 percent) said they were "very concerned" about being able "to obtain basic shelter conditions for [their] family." 170 Many upper-income Canadians are similarly concerned. About one third of Canadians in the survey's top household income group ($80 000 or more) reported being "very concerned" about having sufficient money for a basic and balanced diet and to obtain basic shelter conditions for their family.

Consumers' incomes increased after mid-1990s recovery

As is generally the case, family income has been correlated with the overall performance of the economy over the last two decades – experiencing declines in the early 1980s and 1990s and making recoveries in the later years of each decade. The economic recovery beginning in the mid-1990s, in particular, substantially increased Canadian families' after-tax incomes, since it was on average stronger than the one that occurred a decade earlier. When considering families in the middle income quintile, 171 their average after-tax income in 1989 ($48 064) was slightly less than the previous peak ($48 767) in 1980, but stood at an all-time high ($51 074) in 2001, after an extremely buoyant period in the late 1990s and first two years of this decade.

Income distribution has become more polarized

An examination of after-tax income (using quintile analysis) reveals further differences between the two most recent economic recoveries. 172 First, Canadian families in the lowest income quintile made the most substantial gains (in percentage terms) in their after-tax income during the recovery in the 1980s. These families experienced a gain of 7.4 percent (or $1400) in their average after-tax income over the decade, 173 while the other 80 percent of Canadian families were roughly in the same financial position in 1989 as they were in 1980 174 (see Figure 5.1).

Income polarization reflected in neighbourhood segregation

A recent Statistics Canada report concluded that the income gap between richer and poorer neighbourhoods rose from 1980 to 2000 (and especially from 1990 to 2000) in most census metropolitan areas (Heisz and McLeod 2004). In Toronto, for example, median family income in the poorest 10 percent of neighbourhoods amounted to $32 900 in 2000, up 2.6 percent from 1980. In contrast, median family income for the richest 10 percent of neighbourhoods was $92 800, up 17.4 percent (Statistics Canada 2004). Depending on the geographic distribution of neighbourhoods and their size, this may have an impact on the types of locally based retail services.

In contrast, the most recent recovery was led by Canadian families at the top of the income scale. In fact, from the trough in 1993 to the peak in 2001, families in the top income quintile experienced a 23.9-percent increase in their average after-tax income, while increases experienced by the other four quintiles over this period ranged from a low of 9.7 percent (lowest quintile) to 15.3 percent (second highest quintile).

As a result, income distribution in Canada has become more polarized in recent years. When taking into consideration taxes and transfers, the highest family income quintile received 5.5 times more income in 2001 than did the lowest family income quintile, which represents the highest after-tax ratio in the last 20 years.

As for middle and lower-middle income Canadian families, the data reveal a prolonged period of stagnation in their after-tax incomes over the last 20 years. At the end of each decade (i.e. in 1989 and 1999), families in the second lowest and middle (after-tax income) quintiles had yet to recover to their real average after-tax family income level of 1980, while families in the other quintiles had all recorded gains by the end of each decade.

Figure 5.1

Growth in Average After-Tax Family* Income** by Quintile, 1980–2001

* Two or more persons.

** In constant 2001 dollars.

Source: Income Trends in Canada (Statistics Canada CD-ROM, 13F0022XCB, Table 7.03).

Income gains for two-parent families with children and two earners

Examining after-tax income by family structure is a complementary method to quintile analysis in looking for key income trends. Statistics Canada notes that it is necessary to take family size into account when examining family incomes to study issues such as income adequacy or socio-economic status. For this reason, family incomes are often presented by specific family types, since the differences in family size within each type are generally not significant (Statistics Canada 2003, 133). A further benefit of studying income trends by family type is that several measures have been developed to examine the low-income situation in Canada from a family perspective.

Family concepts

All references to families in this chapter refer to economic families, a broader concept than a Census family (the unit of analysis in Chapter 3 on demographics).

  • Economic family: a group of two or more persons who live in the same dwelling and are related to each other by blood, marriage or adoption.
  • Census family: requires that family members be a male or female spouse, a male or female common-law partner, a male or female lone parent, or a child with a parent present.

For example, a brother and sister living together (without their parents) are an economic family (since they are related by blood), but would not constitute a Census family. By definition, all persons who are members of a Census family are also members of the same economic family.

Sources: Income in Canada: 2000 (Statistics Canada Cat. No. 75-202) and 2001 Census Dictionary (Statistics Canada Cat. No. 92-378).

Two-parent families with children made substantial gains in their median after-tax income over the 1990s: their incomes reached $58 532 in 2001, which represented an all-time high and a 16.9-percent increase (from $50 081) compared to their median after-tax income in the trough of 1993. However, the data reveal that this was largely the result of adding an additional earner to the labour market. For example, the median after-tax income for two-parent families with children and only one earner was $38 599 in 2001 – a 4.7 percent decline from 1989 (and a 6.7 percent decline from 1980) (see Figure 5.2). In comparison, two-parent families with children and two earners witnessed significant increases in their median after-tax incomes: a gain of 12.2 percent relative to 1989 and 9.1 percent relative to 1980.

Figure 5.2

Growth in Median After-Tax Income,* 1980–2001

* In constant 2001 dollars.

Source: Income Trends in Canada (Statistics Canada CD-ROM, 13F0022XCB, Table 6.05).

Lone-parent families still tend to have lower incomes

The financial situation of lone-parent families has improved dramatically over the last decade, particularly the last four years. Whether measuring from 1989 to 2001 (peak-to-peak) or 1993 to 2001 (trough-to-peak), lone-parent families have experienced the most rapid growth in median after-tax family income of any economic family type.

However, in spite of these substantial improvements for most household types, relative to two-parent families with children, lone-parent families still face severe financial pressures: their median after-tax income in 2001 was approximately half that of two-parent families with children ($29 133 versus $58 532). While this difference is very substantial, it must be recognized that lone-parent families are, on average, smaller than two-parent families with children. For example, lone-parent families consisted of an estimated average 2.9 people in 2001, compared to 4.1 people for two-parent families with children.

Lone-parent families, however, are still much more likely to have low incomes than are other family types. In 2001, the rate of low income 175 among lone-parent families (28.6 percent) was about four times higher than that of two-parent families with children (6.7 percent) and five times higher than for married couples without children at home (5.8 percent).

Elderly consumers maintain income gains

The median after-tax income of elderly Canadian families was $31 103 in 2001, almost unchanged (+0.9 percent) from the trough of 1993. In contrast, the median after-tax incomes of unattached 176 elderly individuals increased 8.9 percent over this period (from $15 365 to $16 734 for women and from $16 744 to $18 232 for men).

When considering the two-decade period in general, a major international success story is Canada's substantial reduction in low-income rates among the elderly (see Figure 5.3). The low-income rate of elderly Canadians (elderly families and unattached seniors) was dramatically lowered during the 1980s. 177 This phenomenon occurred during a period in which transfer payments to seniors increased rapidly. When comparing 1980 and 2001, the low-income rate for elderly families was cut by more than half, declining from 7.1 percent to 3.3 percent. Even more impressive is the reduction in low income experienced by unattached elderly Canadians over this period: from 45.5 to 16.4 percent for men and from 56.1 to 20.5 percent for women.

Figure 5.3

LICO Prevalence Among the Elderly, 1980–2001

Source: Income Trends in Canada (Statistics Canada CD-ROM, 13F0022XCB, Table 8.04).

Earnings of recent immigrants worsen

It is not currently possible to examine the earnings performance of recent immigrants to Canada using Statistics Canada's main income information source. 178 Some recent studies using Census data provide interesting insights, but it should be noted that, due to differences in data sources, direct comparisons should not be made between the information below and the numbers cited earlier in this chapter.

Current research reveals that the earnings of recent immigrants to Canada (especially males) have deteriorated over the last 20 years, and that immigrants are not doing as well as native-born Canadians. Comparing 1980 with 2000, recent male immigrants 179 working full time, full year witnessed a 7-percent decline in their earnings, 180 compared with a 7-percent increase for comparable Canadian-born men (Frennette and Morissette 2003).

One consequence of this declining earnings record is that the (long-term) low-income rate for recent immigrants is on an upward trend. A recent study (Picot and Hou 2003) using Census data reveals that the low-income rate 181 among recent immigrants 182 rose significantly between 1980 to 1990 (from 24.6 percent to 31.3 percent) and 1990 to 2000 (to 35.8 percent). A consensus on the cause or causes of these poor income rates among recent immigrants has not been reached. Some potential factors have been ruled out, including a change in the educational attainment of immigrants over time, the general labour market conditions over the last 20 years and differences in the ages of recent immigrants (compared to native-born Canadians). Statistics Canada notes that "compared to earlier cohorts, recent immigrant cohorts will – at least in the near future – be more likely to have difficulty making ends meet and will also be more financially vulnerable to shocks such as job loss or unexpected expenditures" (Frennette and Morissette 2003, 16).

Another Statistics Canada publication notes that the difficulties encountered by recent immigrants between 1991 and 1996 were similar to the problems facing young native-born Canadians, a group that is comparable in the respect that they also have relatively little Canadian work experience. In addition to this problem, recent immigrants also face other unique challenges, including a lack of fluency in one of the two official languages (see Chapter 4) and problems with their foreign credentials being recognized. 183 This is corroborated by the Longitudinal Survey of Immigrants to Canada, which reveals that these three factors were the most serious difficulties encountered by immigrants when entering the labour force in 2001 (Statistics Canada 2003b). This survey also revealed that:

Some six months after their arrival, 26 percent (or 32,300) of immigrants who had professional credentials had at least one of their qualifications verified by an employer, an educational institution or the governing body of their profession within Canada. Another 13 percent had credentials checked by other sources outside Canada or by immigration officers, while 61 percent had not had any of their credentials validated (Statistics Canada 2003b, 35).

These problems were especially true among immigrants originating from countries with education systems substantially different than Canada. Finally, while difficult to measure, the role of discrimination against immigrants (who are increasingly members of a visible minority) may be another potential contributing factor in their recent poor performance (see Chapter 3).

Research opportunities

More research may be justified for another demographic group, "married couples with other relatives," who accounted for 12 percent of non-elderly families in 2001. This group was not analyzed in this report due to its diversity (and limitations in the data available). For example, it is not possible to isolate trends for the "sandwich" generation families (with both children and senior parents living in the home) versus trends occurring for Canadian immigrants (who are more likely to have extended households).

Further research into the circumstances of other groups of Canadians with lower than average incomes would also be useful. Lone-parents represent one such group, as well as Aboriginal people. Similarly, the reasons for the poor income performance of new entrants to the labour market (recent immigrants and young Canadians) could be further explored.

Footnotes

168 Unless otherwise stated, the source of all data in this chapter is Income Trends in Canada: 1980-2001 (Statistics Canada 13F0022XCB). Back to text

169 "Other income" accounted for the remaining 1.7 percent of total income in 2001. Back to text

170 Questions commissioned by the Office of Consumer Affairs for the Environics Research Group's Focus Canada survey (2002, first quarter). Back to text

171 The average income (after tax, economic family) of the middle quintile is used here as a reference point for the typical Canadian family. Back to text

172 See the appendix for further information regarding the use of income quintiles to analyze family income. Back to text

173 The real average after-tax income for the lowest quintile of economic families increased from $18 858 in 1980 to $20 258 in 1989. Back to text

174 Of the remaining four groups, the highest income quintile made the strongest gain (+1.8 percent) over the decade, while those in the middle quintile were the furthest behind (-1.4 percent). Back to text

175 The rate of low income is based on Statistics Canada's low income cut-off (LICO). See the appendix for further details on this indicator of low income. Back to text

176 An unattached individual is defined as a person living alone or with others to whom he or she is unrelated (e.g. a lodger). Back to text

177 In fact, the majority of the reduction in low-income rates that occurred for senior Canadians happened in the 1980s. Back to text

178 Statistics Canada's CD-ROM Income Trends in Canada does not separate data by immigration status or origin of birth. Back to text

179 A recent immigrant is defined as someone who has arrived in Canada within the last five years. Back to text

180 Earnings included wages and salaries and self-employment income. Back to text

181 Low-income figures presented are 1992-base (after government transfers, before income taxes). Before-tax low income cut-offs (LICOs) were used because the Census only reports before-tax income data. Hence, direct comparisons to other LICO figures presented in this chapter (based on after-tax LICOs) are not possible. Back to text

182 The same definition of recent immigrant applied in this study: an immigrant being in Canada for less than five years. Back to text

183 Statistics Canada, 2001 Census – Shaping the nation's workforce: Immigrants, demand for skills and an aging population, available at the Statistics Canada Web site Back to text

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