Friday, April 25, 2014

The Canadian middle class has the precise geometric shape of a political football

Impossible to draw any conclusions from "New York Times story" 

The "New York Times story" about the apparent relative decline of the American middle class was delivered as if by providence unto Canadian pundits and politicos who have leaped from all sides of the field to intercept this political football and run it towards their own particular goals.

The obvious problem with this story is that it was based on one specific set of data which, objectively speaking, provides zero basis upon which to draw any meaningful conclusions about the condition of the Canadian middle class. The data used is "median" income, which is, at best, an arbitrary measure of middle class. There are an equal number below and above a median income, however the median gives little insight into the values above and below the line.

While median income over time and in comparison with other countries certainly gives some clues as to the economic conditions in a country, there is no reason to conclude that our middle class is stronger than ever or otherwise. To extrapolate that "Canada's middle class is No. 1" ("or 2 or 3 or 4") and broadcast this on national media far and wide grossly exaggerates the impact of the numbers.

Many people would contest the results purely on the basis of gut instinct. Over the past two or three decades, we have witnessed erosion of union power and influence. We have seen thousands of jobs that used to be secure with benefits and pensions get outsourced to low-paying small companies, to a guy with a truck, or to overseas workers making $1 or $5 a day. Meanwhile, as wages "seem" to have stagnated, costs "seem" to have skyrocketed. Stuff like insurance, bank fees, gas at the pump, school fees, groceries, rent, etc., etc.

However accurate our gut feelings may be, though, our vested interest can play tricks on us, that's for sure.

So I looked at some other figures. Instead of the "Luxembourg" numbers tapped into by the NY Times, I looked at figures provided by the Paris School of Economics.

What happens say, if, instead of using "median" income as the determiner of middle class, we use the average income of the bottom 90% of earners. The problem often cited with using average incomes is that extremely high figures on the top end can throw off results. And, since we already know that the top 10% of earners bring home a disproportionately large share of the income in the country (actually about 40% in Canada), we can safely assume that those below 90% will be about as close to the "middle" as the "median" might be assumed to be.

Here is what I found out:

Since 1940, the average income of the lower 90% essentially increased by 30-50% each decade up until 1980. After that it has basically stopped growing except for in the past few years, with waters muddied by a change in database tabulating systems.

Average Income of Bottom 90% in Real 2000 C$

1940:   4000
1950:   6400
1960:   8400
1970: 12200
1980: 16400
1990: 17800 or 18100*
2000: 15900 or 17500*
2010:   n/a     or 19100*

* second figure based on alternate "LAD" database system

So how do we rationalize this with Andrew Coyne's assertion in the National Post that "In fact, pick any time frame except 30 years — 10, 20, 40, 50 — and the trend is up. The only one that produces relative stagnation is the one beginning in 1980."? Of course, the answer is that it does not rationalize whatsoever.

My own take is that middle class incomes in the past century rose in general until 1980 due mostly to union efforts and socially progressive policies. The rise of Reaganism and so-called supply side economics from 1980 might have amounted to only a minor correction or adjustment in the long run scheme of things. However there was a multiple-whammy in the '80s and '90s, as information technology and overseas outsourcing began to exert huge pressures on wages, as well as on other aspects of the economy.

The result is that the average earnings of the top 10% of earners in Canada since 1980 have risen 37% from $84,000 to $115,000, while the bottom 90% have had their earnings increase far more slowly (a maximum 18% over the 35 years). These are irrefutable facts that clearly support the "gut feeling" most Canadians probably have, that they are falling further behind.  

Still, it is clear that the "median" income figures used in the NY Times also do exist, perhaps in some parallel world, whose relation to the real world could be explained in an in-depth, sophisticated analysis that would go well beyond the kind of shallow political football game being played by all the sundry commentators.

The problem is that "Canada's middle class is No. 1" is the one and only message that our media successfully conveyed and this works to the distinct advantage of the Conservative Party of Canada. Which is no surprise.

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