Putting income per capita in context
Income per capita is the most frequently used statistic for comparing economic well-being across countries. It is calculated as gross domestic product (GDP) per capita—it is not a measure of personal income. Therefore, income per capita measures the value of good and services exchanged in the marketplace. High performance in this category, either in terms of growth or the level of per capita income, does not guarantee a high quality of life. Nevertheless, a country that is not generating enough income for its citizens is hampered in what it can do on the environmental and social fronts.
The indicator is a per capita measure, because a country’s total income may rise as its population increases, even though there may have been no improvement in the income level of the average citizen. To compare per capita income, the indicator is also adjusted to remove the effects of price changes.
Many economists have pointed out the shortcomings of income per capita as a measure of well-being. For example, income per capita actually rises as crime rises if the country spends more money to fight that rising crime—on a larger police force or improved intelligence technologies. Indeed, among Canada’s 16 peer countries, the U.S. has the second-highest level of income per capita but also the highest rates of poverty and homicides and the lowest life expectancy. Several adjusted-GDP indicators are now being developed to try to account for the social or environmental aspects not captured in GDP calculations.
Has Canada moved to the back of the class?
Not exactly, but Canada’s ranking on income per capita dropped from 6th position among comparator countries in 2000, to 8th in 2008, where it remained through 2012. Canada’s income per capita was US$36,138 in 2012—about $12,000 below Norway, the top performer.
Canada’s income per capita also trails that of the United States. The Canada–U.S. per capita income gap tripled between 1980 and 2012, to nearly $7,000. Canada is stuck at about 84 per cent of the U.S. level.
Use the drop-down menu to compare the change in Canada’s income per capita with that of its peers.
What is the connection between productivity and per capita income?
The most important determinant of a country’s per capita income, over the longer term, is the level of and growth in productivity. Why? Because there is no limit to productivity growth. There is a limit to how many hours there are in a day that employees can work, how low the unemployment rate can go on a sustained basis, how high the labour force participation rate can rise, and how large the proportion of working-age people within the total population can be. But innovation and technological change can sustain productivity growth indefinitely, and drive the growth rate over time.
In the equation below, productivity is the only component with no upper limit. Therefore, improving productivity in Canada is the only sustainable way to reduce the sizable gap between Canadian and U.S. income per capita that has emerged in recent decades.
Why is Canada’s income per capita lower than that of the United States?
Lower labour productivity accounts for the largest component of the income gap between Canada and the United States. To get an idea of the role each component of income per capita plays in the Canada–U.S. income gap, we used the equation shown above, substituting U.S. data for one component at a time, and keeping the country data for the other four components. For example, to calculate what portion of the Canada-U.S. gap in income per capita is due to Canada’s lower labour productivity, we substitute U.S. labour productivity into the equation but keep Canadian data for the other four components (hours worked, unemployment, labour force participation, and demographic structure). When Canadian data are used for all five components, the income per capita in 2011 is calculated as US$36,168. If we use the Canadian data for four of the components, but use the U.S. productivity level (which is US$52.40 per hour worked) instead of the Canadian productivity level (which is US$41.50 per hour), the income per capita in 2011 is $44,638. This means that Canada’s lower level of labour productivity is causing its income per capita to be US$8,500 lower than it could be.1
The results for Canada are described here and shown in the chart below. (The chart also shows result for all the other peer countries.)
- If Canada’s level of labour productivity had increased to the U.S. level (and the other four factors had stayed the same), Canada’s income per capita would have been $8,500 higher.
- If Canada’s hours worked had increased to the U.S. level (and the other four factors had stayed the same), Canada’s income per capita would have been $1,500 higher.
- If Canada’s ratio of employment to its labour force had decreased to the U.S. level (and the other four factors had stayed the same), Canada’s income per capita would have been $500 lower.
- If Canada’s labour force participation rate had decreased to the U.S. level (and the other four factors had stayed the same), Canada’s income per capita would have been $2,000 lower.
- If Canada’s share of working age people had decreased to the U.S. level (and the other four factors had stayed the same), Canada’s income per capita would have been $1,000 lower.
So, in Canada’s case, lower labour productivity and fewer hours worked caused Canada’s income per capita to be lower than that of the United States. What helped to narrow the gap? Canada’s higher ratio of employment to its labour force, higher labour force participation rate, and higher proportion of working age people all helped to push up Canada’s income per capita relative to that of the United States.
Statistics Canada has raised questions about the reliability of the measures commonly used to compare Canadian and U.S. income per capita.2 Shortcomings have been noted in the data on coverage, concept, and accuracy of hours of work. However, even with adjustments to account for these shortcomings, productivity still contributes to a significant portion of the gap in income per capita with the United States. The Conference Board’s longstanding message has not changed: Improving productivity should be a policy priority in Canada—it is the only sustainable way to narrow the Canada–U.S. income gap.
Use the drop-down menu to see the factors affecting the income gap with the U.S. for different countries.
Does having higher labour productivity than the U.S. guarantee that a country will also have higher income per capita?
Not necessarily. Ireland and Norway both had higher labour productivity than the U.S. in 2012. But only Norway—with with its huge oil and gas revenues—was able to convert this into higher income per capita than in the United States.
Why is Norway so much richer than Canada?
Both Canada and Norway have benefited from higher world energy prices, but the oil and gas sector accounts for a much larger proportion of the economy in Norway. There are also some differences in the relative mix of oil and gas produced in the two countries, with Canada producing relatively more natural gas (and the North American price has declined in recent years) and more heavy crude oil, which is worth less than light oil.
What do higher oil prices mean for Canada and Norway?
Higher oil prices are a net positive for both Norway and Canada, but each country is facing different pricing and related fiscal conditions. North America is currently awash in oil—U.S. production is surging in states like North Dakota and Texas, while Canadian production is also on the rise and will continue to increase steadily over the next 15 years. The benchmark price in North America, West Texas Intermediate (WTI), is about $95 per barrel, but Canadian producers are getting far less, partly because of a lack of pipeline capacity to handle exports to the United States and other global markets. In contrast, the European benchmark price, Brent, is about $110 per barrel. Western European prices are bolstered by stronger demand coming out of developing regions and never-ending geopolitical turmoil from key producing regions in the Middle East.
Both Norway and Canada made plans to save some of their oil revenues for the inevitable rainy day, but their fiscal strategies are now diverging. In Norway, concerns about the longer term sustainability of North Sea oil and gas production (some analysts say this production has already reached or passed its peak) led the Norwegian government to establish the State Petroleum Fund—now called the Government Pension Fund—in 1990. A portion of annual oil and gas revenues flows into the fund every year. Norway has consistently put aside part of its resource surplus into the fund and, as a result, it is one of the largest sovereign wealth funds in the world.
In Canada, Alberta has two savings funds for its oil and gas revenues. The first—the Alberta Heritage Savings Trust Fund—was established over 30 years ago to save about 30 per cent of oil and gas revenues for the province’s long-term future. Unfortunately, for nearly two decades, the real value of this fund has not increased in any significant way, as successive governments decided to use the royalty revenues to fund current spending, not to invest for tomorrow. Had the Heritage Fund’s original intentions been adhered to over the past three decades, the value of that fund could easily exceed $100 billion today.
A second savings account called the Alberta Sustainability Fund was created to manage short-term revenue fluctuations. This fund grew quickly during the boom years, but the value has since dropped from $17 billion to closer to $3 billion by fiscal-year 2013. The remaining savings could easily be absorbed by the government.
In short, Norway and Alberta, Canada’s top energy producer, each had a long-term vision for managing their energy wealth, but they have adopted different strategies and are headed in different fiscal directions.
Has Canada’s report card on income per capita improved?
Canada’s relative position among its peer group of countries has slipped. In the 1970s, Canada’s GDP per capita was US$20,340, the fourth highest of its peer countries, earning a “B” grade. This grade was maintained in the following decade but dropped to a “C” average in the 1990s and 2000s.
Many countries saw their letter grades slip in the 1990s and 2000s. This does not mean that income per capita was falling, but it does indicate that the top countries were setting the bar higher every year, thereby further widening the income gap with Canada. In other words, the top countries were pulling farther ahead of the pack.
Canada will find it increasingly difficult to narrow the gap. Countries with lower income levels need greater and sustained income growth to try to match or exceed superior economies.
Has any country managed to move up in the income per capita ranking?
Until recently, Ireland was the standout success story. Ireland transformed itself from one of the poorest countries in western Europe to one of the richest. After its chronic showing as a “D” performer in the 1970s, 1980s, and 1990s, Ireland jumped to 3rd place in the 2000s. In the 1970s, Canada’s income per capita was almost double that of Ireland; by 2007, Ireland’s income per capita exceeded Canada’s by US$5,000 in 2007, although the gap slipped to only US$800 by 2012.
What ignited Ireland’s economy? A number of parallel developments played significant roles. These include prudent fiscal policy, increased European Union structural funding, development of the single European market, lower labour costs, and deep cuts to corporate tax rates. Ireland’s FDI-friendly environment certainly provided a strong foundation for growth. The result was a substantial increase in foreign direct investment into the country.
Ireland has once again fallen on hard times since the 2008–09 bursting of the property bubble and associated banking crisis that imposed a huge fiscal and economic cost on the Irish people. Nevertheless, the foreign investment segment of the Irish economy has been able to sustain its level of activity, and provides a cornerstone for rebuilding the Irish miracle, if and when the domestic economy can recover.
1 Note that the individual gaps generated using this methodology will not necessarily match the overall Canada–U.S. income gap shown in the first chart.
2 Jean-Pierre Maynard, The Comparative Level of GDP Per Capita in Canada and the United States: A Decomposition Into Labour Productivity and Work Intensity Differences (Ottawa: Statistics Canada, 2007).