Atlantic Collaborative Applied Research in Economics

Impacting Local Community

Atlantic Canada: Canada’s Nirvana for the Middle Class
January 31, 2020Doug May

Governments in Canada, the US, and Britain are fixated on the “prosperity of the middle class”. In addition, the US and Britain are also focused on the “Top 1%” and growing inequality. The political story is that the middle class has been “hollowed out” with the Top 1% grabbing most of the wealth, while those in the middle class increasingly struggle to make ends meet. But do these stories correspond to the facts? Let’s explore the evidence for Canada, generally, and focus in on the Atlantic provinces, in particular.

The first task is to determine who is in this “middle class”. Prime Minister Trudeau’s answer to this question is that the middle class is comprised of all those individuals who believe that they are in the middle class. If this is true then Statistics Canada's 2016, General Social Survey informs us as to the size of the middle class in that year. We learn that just about 94 Canadians out of 100 consider themselves to be in the middle class. Only just over 1% consider themselves to be rich and about 4½% consider themselves to be in the low income or poverty.

But how do social accountants and economists identify and quantify those in the middle class? Surprisingly, in spite of the political discussions around this topic there is no internationally agreed upon quantitative definition for the middle class. The OECD (Organization for Economic Co-operation and Development) have defined various “income classes” based on “disposable” income, that is, income after taxes are subtracted from and transfers added to household income. This disposable income is then adjusted for the household size. The focus then is on a “standardized” household comprising 4 individuals (presumably 2 adults and 2 children) and its median income, that is, the income where half of the households in a province (or country) have income above this level and half below. In 2017, the median disposable income in Atlantic Canada for a family of 4 was $78,600. To define the “middle income class” we need to define upper and lower boundaries. These are percentages of this median adjusted disposable income. The OECD defines the lower boundary as 75% of this median and the upper boundary as 200% of the median. Our definition is slightly different from the OECD's following that of the IMF (International Monetary Fund) with the lower boundary being ½ of the median income and the upper boundary 1½ times the median. Coincidentally, our lower boundary is the OECD's threshold for individuals living in low income or as is commonly referred to “in poverty”. Whichever definition you use, the story about the rise and fall of the middle class is somewhat the same.

Now that we have the boundaries, the middle class is simply the percentage of the population living in households within the upper and lower boundaries. The question for us to answer is: how has the percentage of the population living within these boundaries changed over the years? The surprising answer, given all of the political rhetoric, is that the percentage has changed very little over the period from 2000 to 2017 with 2017 being the last year in which our tax filer data are available. The percentage is up a little bit in Newfoundland, Nova Scotia, New Brunswick and Canada and down a bit in PEI but PEI has the largest proportion of its population in the middle class in Atlantic Canada and most likely in Canada. That is, about 65 people out of 100 are in the middle-income class in 2017. All of the Atlantic provinces are over 60%. Canada is just below this level at about 58.6% in 2017. By contrast the USA would be well below 50%. Is there a “hollowing out of the middle class” in Atlantic Canada since 2000? Absolutely not!

Another concern is that we're all getting poorer, that is, our real disposable income is falling and by implication, the quantity of goods and services that our economic well-being also depends on, is also falling. It is true that in Canada, there was the decline in this real income from about 1980 to 1997 but since then adjusted real disposable income for individuals has grown. For example, this median family of four, disposable income in 2000, adjusted for inflation for Canada was $66,200 in 2017 dollars and in 2017 it was $85,000. This translates into just over a 28% increase in real income, in our own real buying power with our disposable income. Now, real disposable incomes are lower in Atlantic Canada than in Canada as a whole by just about 7½%, but does this mean that our standard of living is lower by that percentage? Well, maybe not. We don't know since we cannot compare differences in the cost of living between regions or cities. While food may be more expensive in Fredericton than Toronto, the costs of housing surely aren’t!

What about growing income inequality? Well both Statistics Canada’s estimates and our own, based on tax filer data, do not demonstrate any significant increase in the proportion of our population in the upper income group. The Statistics Canada study does show some increase in this proportion in the period from 1980 to 1997 but not a dramatic one. In our Atlantic provinces, it was only PEI that the Top 1% grow faster than the bottom 10% in the 2000-2017 period. In terms of our real disposable income we cannot conclude that income inequality has been growing.

While rising inequality and falling real disposable incomes might exist in other countries, using our administrative population, tax filer, income data we cannot provide evidence of these phenomena for Canada and certainly not for the Atlantic provinces within Canada. In fact, real incomes have been rising and the middle class has remained almost stationary but generally with some marginal growth. The political call for strengthening the middle class and increasing its prosperity may capture votes by appealing to 95% of our population. Let’s hope that it does not turn our attention away from those individuals living in poverty who really need our help. Finally, the call to action to increase middle class prosperity by the Federal Government seems a bit “hollow” in that this prosperity is already occurring. Let's hope that politicians do not go on to claim responsibility these outcomes.

Family of Four Thresholds of Real (2017$) Disposable Incomes in 2017Source: Authors' calculations in co-operation Statistics Canada using T1FF

Percentage of Populations in Lower, Middle and Upper Income GroupsAll individual's family after-tax income, adjusted for equivalized family size and including zero wages.
Source: Statistics Canada T1FF Special Tabulation 09_17_2019 NL_t1ff_Counts.xlsx

Meanwhile in the Atlantic Provinces