- Alberta earns an “A+” grade with a higher per capita income than the top-performing peer country.
- New Brunswick and P.E.I. score “D-” grades for levels of income per capita that are lower than that of the worst-performing peer country, France.
- Ontario’s grade on income per capita has slowly declined since the early 1980s.
Putting income per capita in context
Income per capita, calculated as gross domestic product (GDP) divided by population, is the most frequently used statistic for comparing economic well-being across countries. High performance in this category, in terms of either 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.
This indicator is measured on a per person basis, 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 over time in real terms, 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 15 peer countries, the U.S. has the second-highest level of income per capita but also the highest rates of poverty and homicide 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.
How do the provinces fare relative to Canada’s international peers?
Alberta earns an “A+” grade, with an income per capita even higher than that of Norway, a country generally regarded as having one of the highest standards of living in the world. While Alberta is the only province to attain an “A” grade or higher, Saskatchewan and Newfoundland and Labrador earn “B” grades, with per capita income levels close to that of Switzerland. Recent strong growth in real GDP in these provinces due to the resource boom has helped lift levels of per capita income.
New Brunswick and P.E.I. rank at the bottom of the pack. Both provinces score “D-” grades, with incomes per capita lower than that of France, the worst performer among Canada’s international peers. The “D” and “D-” grades for the provinces of Manitoba, Quebec, Nova Scotia, New Brunswick, and Prince Edward Island place them in the company of Japan and some European countries that have experienced weak economic growth for the past two decades. Per capita income levelled off in Japan—its two-decade-long slump in economic growth was due to the presence of deflation, which successive Japanese governments have only recently been able to address. In contrast, in the 1970s and 1980s, Japan experienced sharp gains in its standard of living thanks to a boom in exports to developed countries in the West.
How do the provinces perform on income per capita relative to each other?
In addition to ranking the provinces against Canada’s international peers, the provinces have been compared with each other and placed into three categories: “above average,” “average,” and “below average.” 1 Alberta is the only province ranked as above average on per capita income in 2013. This is not surprising, given the energy wealth that has led to sharp gains in real GDP in the province. The Maritime provinces—Nova Scotia, New Brunswick, and P.E.I.—have the lowest per capita income. These provinces have experienced weaker real GDP growth than the rest of Canada for many decades, resulting in low levels of per capita income. New Brunswick and P.E.I. were the only two provinces with per capita income levels below US$30,000 in 2013.
Why is Alberta the standout performer?
Alberta’s energy wealth has led to huge increases in investment, as well as job and income growth that have propelled the province not only to the highest standard of living among the provinces but to one of the highest standards of living among all developed countries. Even though the province’s wealth has resulted in high interprovincial in-migration, especially from provinces in Central and Atlantic Canada, gains in real GDP have been strong enough to offset increases in population and keep income per capita high (a rising population tends to put downward pressure on per capita income). Between 1981 and 2013, Alberta’s population increased by 76 per cent, the highest increase in the country. By comparison, Canada’s population grew by 42 per cent over the same period.
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 productivity—both its level and its growth. Why? Because there is no limit to productivity growth. There is a limit to how many hours in a day 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 in the total population can be. But innovation and technological change can sustain productivity growth indefinitely, driving the growth rate over time.
In the equation below, productivity is the only component with no upper limit. Therefore, improving productivity is the only sustainable way to reduce the sizable gap between the income per capita of the U.S. and most provinces.
Why do most of the provinces perform poorly on income per capita relative to the United States?
To understand the differences in income per capita among the provinces and peer countries, we need to look at the previous equation and determine which component of income per capita is causing the income gap.
The equation in the previous section illustrates how income per capita can be broken down into three components:
- Labour productivity is defined as GDP per hour worked. It measures the economic value produced by the average employee.
- Work intensity is defined as the average number of hours worked per employee.
- Labour market is defined as the share of employees in the overall population. It is affected by three factors:
- the ability of the economy to create jobs
- the demographic profile—what proportion of the population is of working age and therefore potentially able to work.
- the proportion of the working-age population that actually joins the labour force
The table lists the dollar amount that each component contributed to the income gap in 2012. In Ontario, for example, income per capita was US$36,300 in 2012, while the U.S. had an income per capita of US$45,283, meaning the income gap was US$8,983. Lower labour productivity accounted for US$11,374 of that gap, and the fact that Ontario workers worked fewer hours in a year than their counterparts in the U.S. added another US$1,446 to the gap. Luckily, however, Ontario had a higher employment rate, a higher labour participation rate, and a more favourable demographic profile. These labour market components combined reduced the income gap by US$3,837.
The only province with higher income per capita than the U.S. was Alberta. Even though the province had slightly lower labour productivity in 2012, the other components worked heavily in Alberta’s favour.
Overall, here’s how the three components of income per capita affected the income gap with the United States:
- In all provinces, lower labour productivity accounted for the greatest share of the income gap with the United States in 2012. The negative effect was strongest in P.E.I., where it accounted for US$20,246 of the gap, and lowest in Alberta, where it accounted for only US$826.
- The effect of work intensity increased the income gap in all provinces but Alberta and Newfoundland and Labrador. The lower hours in eight of the provinces could reflect a decision to work fewer hours and/or the inability of the provincial economy to create enough demand for workers to work more hours. Quebec, where workers average slightly less than 32 hours per week, had the lowest work intensity. Alberta, with an average work week of just over 35 hours, had the highest.
- The effects of the labour market on provincial income gaps were mostly positive, reducing the income gap in all provinces but Newfoundland and Labrador.
- The ability to create jobs was uneven. The ratio of employment to the labour force was lower than the U.S. ratio in four provinces (Newfoundland and Labrador, P.E.I., Nova Scotia, and Quebec) and higher in the remaining six provinces. The positive effect was particularly significant in Manitoba and Saskatchewan, where the unemployment rates are low.
- The demographic profile helped to reduce the income gap in every province. This means that the percentage of the population that is of working age (and therefore able to contribute to the creation of products and services that increase GDP) is higher in all provinces than in the United States.
- In all provinces but Newfoundland and Labrador, the effect of higher labour force participation relative to the U.S. helped to reduce the income gap.
How have the provinces’ grades on income per capita changed over time?
Some of the provinces have managed to improve their grades for income per capita over the past few decades. Until the early 2000s, Newfoundland and Labrador generally earned “D” grades. However, the province’s oil reserves, combined with rising world oil prices, have since boosted levels of real GDP and per capita income. In the mid-2000s through 2013, Newfoundland and Labrador earned mainly “C” and “B” grades. Alternatively, the other Atlantic provinces, without the benefit of huge oil reserves, have attained mostly “C” and “D” grades since the early 1980s.
Ontario’s grade for per capita income has gradually declined since the early 1980s, reflecting the changing fortunes of the province’s economy. Ontario earned “A” and “B” grades in the 1980s and “B” grades in the early 1990s, but has subsequently slipped to “C” grades. Ontario’s real GDP growth has slowed since the 1980s as the province has had to deal with the negative impact on the province’s manufacturing sector of unstable U.S. growth, globalization, and a higher loonie. Also, chronically high fiscal deficits and rising debt levels have made it difficult for the province to invest much more in education and innovation—factors that are crucial to productivity growth and an improved standard of living.
Quebec has also suffered a decline in its grade for per capita income since the early 1980s, and has been a “D” grade performer since the mid-1990s. The province’s economy has been afflicted by the factors affecting the Ontario economy (i.e., high value of the loonie, slower U.S. growth, and globalization), but other factors have also dragged down Quebec’s grades for income per capita. Investor uncertainty has been fed by the on-again, off-again political debate and two referendums, which may have hurt investment and innovation and dragged down overall productivity growth and per capita income since the mid-1990s.
What about the territories?
The Northwest Territories and Yukon have earned either “A+”, “A” or “B” grades on per capita income since the beginning of the 2000s. In fact, per capita income in the N.W.T. has been well above that of every Canadian province since the beginning of the 2000s, when data on the territory as separate from Nunavut started to become available. N.W.T.’s strong resource base, including diamonds as well as oil and gas, is the catalyst for its strong economy.
Yukon’s economy is also largely resource based. Per capita income in Yukon has been above that of all provinces except Alberta since the mid-1980s.
Nunavut’s per capita income is below levels in both the Northwest Territories and Yukon, but is still high by Canadian standards, surpassing the Canadian average in 2010, 2011, and 2012. Its economy is not as developed as the other two territories and, consequently, Nunavut’s overall GDP lags behind.
The economic outlook remains positive for the territories over the next few years. Mining will be one of the most important economic drivers in Northern Canada in the years ahead. Several new mines are slated to open before the end of the decade in Nunavut, Yukon, and the Northwest Territories.
The territories are not included in the overall provincial and international benchmarking calculations because data are not available for many of the indicators included in the six main report card categories. The Conference Board is, however, committed to including the territories in our analysis, and so we produce separate territorial report cards when data are available, such as for income per capita.
The Conference Board of Canada produces a biannual Territorial Outlook report that examines the economic and fiscal outlook for each of the territories, including output by industry, labour market conditions, and the demographic make-up of each territory. The Territorial Outlook can be accessed online at our e-Library and for clients subscribing to e-Data.
Research on issues affecting the territories is also produced by the Centre for the North, a Conference Board initiative that began in 2009.
Does a high per capita income equate to well-being?
In general, a country’s well-being and per capita income go hand-in-hand because a country’s economy must generate a high level of income to pay for the social services that ensure a high quality of life. However, a comparison of the well-being in the U.S. and Canada reveals that one must be careful in using the per capita income indicator to draw conclusions about quality of life in the two countries. The relatively high per capita income in the territories also suggests that this measure does not necessarily equate to a high quality of life. The territories lag behind the rest of Canada on a broad range of social indicators, yet these factors are not captured in the per capita income measure.
Canada’s provinces, except for Alberta, have a lower per capita income than the United States. Yet many would make the case that quality of life is superior in Canada, despite the lower income per capita. For instance, Canada’s per capita homicide rate is far lower than that of the U.S., and the health care system, while far from perfect, provides universal coverage for Canadians. This is not the situation in the United States, where millions of Americans are still without health care insurance. This factor partially explains why Canada continues to perform better on health outcomes than the United States. While the Obama administration’s affordable health care legislation will hopefully improve the health care system south of the border, it will take years before the U.S. attains the access to health care enjoyed by Canadians, who don’t have to worry about an untimely illness leading to personal bankruptcy.
How can the provinces increase their per capita income?
Conference Board research indicates that the best way to increase per capita income is to boost productivity. For all of the provinces, this involves fostering innovation, investing more in machinery and equipment, and attracting more foreign direct investment. As well, a greater emphasis on advanced educational attainment, lifelong learning, and workplace skills training could also help boost productivity and lift per capita income.
1 To compare the performance of Canadian provinces relative to one another, we first determined the average score and standard deviation of the provincial values. The standard deviation is a measure of how much variability there is in a set of numbers. If the numbers are normally distributed (i.e., the distribution is not heavily weighted to one side or another and/or does not have significant outliers), about 68 per cent will fall within one standard deviation above or below the average. Any province scoring one standard deviation above the average is “above average.” Provinces scoring less than the average minus one standard deviation are “below average.” The remaining provinces are “average” performers.