Canadian workers aren’t cashing in on the American dream, as the income gap between the two countries widens.
Benjamin Tal, deputy chief economist at CIBC Capital Markets, calls it “Canada’s income problem.”
“Real disposable income per capita in Canada is currently CAD$13,000 higher than it was in 1980,” he wrote in the report.
“In the U.S., it is USD$25,000 higher.”
Tal notes average real annual disposable income per capita is up 1.3 per cent over the past four decades compared to 1.9 per cent in the U.S., which is 40 per cent faster on a cumulative basis.
“We estimate that the smaller increase in labour market income in Canada accounts for just over 50 per cent of the entire increase in the U.S.-Canada gross income gap since 1980,” he wrote.
Canada has been neck and neck with the U.S. in terms of job creation, but it’s a matter of quality versus quantity.
“Since the 1980s, part-time employment in Canada more than doubled, while in the U.S. it was little changed,” wrote Tal.
“Self-employment has seen a similar divergence. What’s more, the vast majority of the increase in self-employment in Canada has been in the form of unincorporated, one-person operations, which on average, earn 75% of the income earned by paid-employees.”
Demographics also play a role. Tal says population growth in Canada has been higher than the U.S. since 1980, accounting for 15 per cent of the widening of the gap.
“With that extra population growth, we should have seen proportionally extra income growth, and that obviously is not happening,” he wrote.
Tal also chalks up a big part of the gap to taxes, which account for 30 per cent of gross income in Canada compared to 10 per cent in the U.S. The discrepancy is mostly explained by the higher level of government-provided services in Canada.
“Growth in gross income in the U.S. rose roughly at the same rate as net income. At the same time in Canada, net income rose more slowly,” he wrote.
“We estimate that the impact of faster-rising taxes and other transfers to governments [such as CPP] in Canada have accounted for close to one-quarter.”
Canada also trails the U.S. when it comes to income in the form of interest, dividends, and rent.
Tal says if it weren’t for Canada’s overall underperformance, the household debt-to-income ratio would be closer to 150 per cent instead of the 170 per cent it is today.
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.