Mark Stabile is Director of School of Public Policy, a Professor at the Rotman School and an MPI Fellow all at the University of Toronto; Lauren Jones is a post-doctoral fellow at the Martin Prosperity Institute, University of Toronto
America's middle class is shrinking, according to two recent articles in The New York Times. The articles document a steady decline since 1967 in the proportion of households in the middle class, with a smaller but significant decline over the past fifteen years. The Times defines the middle class as families earning between $35,000 and $100,000 a year. What's more, since 2000, more and more households are falling into the lower end of the income spectrum. The proportion of families with incomes below $35,000 has increased while the proportion with incomes above $100,000 has declined (although the average incomes for the families earning above $100,000 has increased significantly).
While the size of the U.S. middle class has shrunk by about 2 percentage points, the size of Canada's has barely changed. The size of the middle class in Canada, when it's defined using the NYT article definition, has stayed remarkably constant over this period at roughly 43 per cent of households (slightly less than in the U.S.). The share earning less than $35,000 has declined by about 15 per cent to 36 percent of all households, and the share earning above $100,000 has nearly doubled to about 20 per cent.
Why is the size of our middle class staying constant while our neighbour's declines? One potential explanation could be the progressiveness of the tax system in Canada, where the rich are taxed at higher rates than the poor. A more progressive tax code could maintain family income levels over time. The size of the middle class in Canada is slightly larger after taxes and transfers (48 per cent). The trends in the size of the middle class in Canada, however, remain stable whether we examine incomes pre- or post-tax. The decline in the proportion of families earning less than $35,000 and the increase in families earning more than $100,000 also remain after taxes and transfers. The tax code is not responsible for a stable middle class in Canada.
Another factor that fails to explain the difference is Canada's two-speed economy, where some regions have enjoyed resource gains while others have suffered manufacturing slumps. The resource boom enjoyed in some parts of Canada accounts for significant growth in the number of high-income families and decline in the number of low-income families. However, while the boom may be to thank for growth in middle class incomes over the last decade (and for some big dips in the 2008 recession), there does not appear to be much difference in the number of middle class families across regions. The beneficial effects of resource booms are found mostly among the top and bottom income groups.
So what does explain the trend differences in the size of the middle class between counties? Scholars have pointed to both the education and health care systems as hallmarks of a more equal society in Canada. Canada's health care system is universal and predominantly publicly funded and Canada's public education system remains popular and strong, with less variation in local funding than the in United States. Strong public investment in these areas could produce a stronger middle class and more social mobility in Canada than in the U.S.
There is another reason that the size of Canada's middle class has stayed constant over the past few decades: More women are working more hours in Canada. Even though male hours and earnings are stagnant, family incomes have been buoyed by the increase in women's earnings. This good news is also a mixed blessing. Having to work longer and harder to stay in the same place is probably not an acceptable long-term solution to maintain the size of our middle class.
Does it makes sense to define the middle class as those who earn between $35,000 and $100,000? If we want to know whether our middle class is growing, then we need to set its boundaries at fixed income levels. If, instead, we are interested in how well the people in the middle of the income distribution are faring, then this may not be the best way to define the middle class. Either way, the trends in the U.S. have been remarkably different from those in Canada. If these trends continue, the size of the U.S. middle class will shrink from much larger than Canada's to much smaller. For now, despite many differences between our two countries, we seem to have ended up in a similar place.