Saturday, November 18th, 2017

Income mobility in Canada

As a person who believes in the greatness of human abilities and is deeply aware of economics, production and wealth creation, I am often frustrated by social problems that I believe can easily be solved through economic freedom but which are prevented by the entrenched collectivism that has come to permeate much of our society. One of these problems is the common perception of poverty, which I think is highly solvable and could be far smaller than commonly believed.

A November 2012 study titled “Measuring Income Mobility in Canada” by Charles Lammam, Amela Karabegovi, and Niels Veldhuis confirms what has been known for many years and what a reasoning  person should quickly realize: the portion of people who spend a long time in poverty is far smaller than many groups would have us believe.

Most studies of income differences are cross-sectional, that is they take a sample at a moment in time and analyze the data, dividing the population into income quintiles (five equal groups).  Such studies always show a certain fraction of the population is at the lower end (someone has to be) and a certain population living below what is called “the poverty line”. The data does not change much over the years, so people who view society in collectivist terms call for higher taxes on the productive members of society, more income and asset redistribution by the government powers and lifestyle support programs to help these supposedly poor people.

What these studies fail to do is track information longitudinally over time to see what actually happens to the individuals who are initially at varying levels of income.  Viewed this way, the problem of poverty is far lower than imagined since the large majority of those who are “poor” at a particular time do not stay poor. The table below is extracted from the study and demonstrates that in a short five years half of the lowest income people had moved to a higher income group.

As the time horizon was lengthened the results were even better, with 83% of the lowest earners moving up in a ten year period.  The greatest income gains were made by those who started out at the lowest levels.  This should not be surprising since many of those people are at the start of their earnings life and have less training, experience and value to employers than those with more experience.  It is entirely natural that their incomes would rise over time and that most of them would succeed.

Finally, the study looked more closely at how far the different groups moved.  Most notably, the lowest initial income quintile saw 26% move up by one group, 25% moved up two groups, 20% moved up to the top 40% and 12% moved up to the top 20% of all income earners.  This is certainly not a story of long term poverty and certainly is not a justification for the massive income redistribution called for and which often make it harder for the poor to rise while certainly punishing the more productive for being productive. That is a path to slower economic progress.

After just 10 years, only 17% of those who were in the bottom quintile were still in that group.  That’s about one sixth of the size of the problem often quoted.  We should celebrate the fact that despite the many government controls and redistribution plans  created over the decades, that we still have a free enough society to see 83% of the poorest people rise from poverty in a relatively short time. The study also looked at 19-year mobility and of course found it was even better than for 10 years, but by ten years there were only a few people left in the lowest income level so naturally there was little room for improvement.

This data is very similar to that published in a 1999 book by W. Michael Cox and Richard Alm titled “Myths of Rich and Poor”.  They used U.S. data from 1975-1991 and published tables much like the ones in the current research paper. I am glad and not surprised to see that Canadian data is very similar to the U.S.

It turns out that much of the effort directed at poverty reduction is not productive.  The truth is that individuals are properly responsible for their own lives and most of them work their way to a better standard of living through their own efforts.  Unfortunately there is always a small number people who are unable to help themselves.  In a free society there is a good chance there will be many benevolent groups willing to help them without any government intervention.

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