Why Canada’s middle class is now richer than the U.S.A.’s, in 8 simple charts: Mike Moffatt

A confluence of trends, but can it continue?

1

A recent New York Times piece on middle-class incomes confirms what Stephen Gordon has been telling us, that the 2000-2010 period was a strong one for after-tax incomes of the Canadian middle class. This is fantastic news—though I am always hesitant to draw strong conclusions from a single data set. In order to intepret this data, there are two important questions we need to ask:

  1. What caused the growth in middle-class incomes to rise between 2000-10?
  2. Will these trends continue in the future? Are these drivers of growth sustainable?

To start to answer these questions, we need to dig deeper into the data. What follows are eight important trends of the 2000-10 period that contributed to the strength of Canada’s middle class.

1. Oil Prices

WTI Price of Oil

The price of a barrel of oil, using the WTI benchmark, rose from $29.70 to $76.32 from mid-2000 to mid-2010, an increase of 157% in only 10 years. Other commodities that Canada exports saw price increases as well, partly due to increased in demand from emerging markets. (I chose WTI as the benchmark, as WCS was only introduced half-way through the decade.) Given the country’s status as an oil exporter, the worldwide rise in oil prices was a windfall for Canada.

 

2. The Exchange Rate

Value of the Canadian dollar

The Canadian dollar appreciated by nearly 42% relative to the greenback, mostly due to the increase in the value of Canada’s oil exports. This was a fantastic increase in purchasing power, which allowed Canadians to purchase imported goods and services at much lower prices. It did, however, put competitive pressures on many Canadian exporters.

3. Full-Time Employment Rates

Chart 3a

The percentage of women between the ages of 25 and 54 with full-time jobs rose from 58% in 2000 to 63% in 2007, as women entered the labour force as never before, causing family incomes to rise. This number fell during the recession, but slowly climbed back to 62% by mid-2010.

The proportion of men with full-time jobs stayed relatively steady until the recession, when it declined significantly. It has yet to fully recover.

4. Housing Prices

Chart4

The above series is Statistics Canada’s New Housing Price Index (NHPI), which “measures changes over time in the contractors’ selling prices of new residential houses, where detailed specifications pertaining to each house remain the same between two consecutive periods.” Unlike in the United States, housing prices continued to rise after the recession. The index rose over 50% during the 2000-10 period.

5. Mortgage Rates

Chart5

Outside of a few years in the middle of the decade, mortgage rates declined steadily over the decade, reducing mortgage costs for homebuyers. Average 5-year mortgage rates fell from 8.12% in mid-2000 to 5.02% in mid-2010, a reduction of nearly 40%.

6.  Household Debt

Chart6

For Canadian households debt loads rose faster than incomes, which may be a reaction to lower interest rates. In 2000, Canadian households debts were equivalent to 13 months worth of income. By 2010, that level increased by four, to 17 months worth of income, a rise of 44%.

7. Government Debt

Chart7a

Unlike for household debts, government debts steadily declined before the recession. Since then, debt loads escalated quickly, with a combined debt-to-GDP ratio of 84.2% in 2010, up from 82.1% in 2000.

8. Demographics

Chart7

The percentage of seniors in Canada rose from 12.5% in 2000 to 14.1% in 2010 and will continue to rise in the future. After-tax household incomes managed to rise despite a graying workforce in the previous decade, giving hope for the decade to come.

One comment on “Why Canada’s middle class is now richer than the U.S.A.’s, in 8 simple charts: Mike Moffatt

  1. The oil price is not a very good indicator. Oil is one of many goods and services that Canada exports, and not very big compared to the others during that period. It wasn’t even particularly big among our net exports of fossil fuels, which in the early years of the decade was completely dominated by natural gas. Natural gas net exports and natural gas prices have dropped very significantly during that period. As to the future, the US EIA predicts a decline total net imports of oil and gas from Canada for a period of 15 years, which includes a decline in gas to zero and a slow decline and leveling off of net liquids. Our gross crude and bitumen exports continue, but our imports will grow even faster.

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