Middle-class wages and how to give them a boost: An Econowatch roundtable

Stephen Gordon, Kevin Milligan and Mike Moffatt discuss
Pablo Morales and his family: immigrants from Argentina, they havebeen in Qc 7 years. They are seen walking near their home inPierrefonds, a middle-class suburb of Montreal, and in theirPierrefonds appartment. The drink with what looks like a straw in itis "maté", the traditional tea-like brew of South America. The ballwith the fleur-de-lys on it that mrs. Morales is holding in onepicture is a traditional "mate" cup from Argentina.

Welcome to the Econowatch round-table on the middle class.

In the past few weeks, our resident economists, Stephen Gordon, Kevin Milligan and Mike Moffatt, have delved into an issue that is, at least nominally, at the top of many politicians’ minds: Middle class incomes haven’t kept up with the pace of economic growth. It’s a phenomenon observed across industrialized countries, and here in North America it has become a flagship issue for both Justin Trudeau’s Liberal Party and the second-term Obama Administration. Questions we will be addressing: Is middle class wage growth truly a problem? And what, if anything, can we do to fix it?

Read everything we’ve written so far on middle class wages.

Erica Alini

Stephen, Kevin, Mike: Thank you very much for coming together for this digital debate. You’ve all brought different insights and points of view to this discussion, but there seem to be several points on which you all agree. I’m going to list them:

  1. Canadian middle class family incomes today are slightly lower than they were in the mid-1970s, in inflation adjusted terms, even though the size of the Canadian economy more than doubled since then.
  2. It’s not that median family incomes in Canada have flatlined for 30 years. Rather, they’ve plunged in the late 1980s and early 1990s, and then came back up, regaining almost all ground lost. It’s a U-shaped trajectory.
  3. Taxes and transfers at both the provincial and federal level have softened the punch for both middle- and low-income Canadian families. However, after-tax income growth for middle income families has lagged that of both wealthier and poorer families.
  4. The trajectory of household incomes masks some relevant trends. For example, women have done OK. If middle class family incomes have seen some growth in the last 15 years, it’s been largely thanks to female salaries. That’s because women tend to be employed in occupations where average wages have been growing. Middle-class men, by contrast, tend to work in jobs where average wages have been declining. Also, one should keep in mind that Canadian families aren’t what they used to be. Today, for example, there are more dual-income households, but also more single working moms and dads. And, in general, we are an older and better educated society. We should adjust for all these factors when comparing incomes then and now.

Still, sometimes you seemed at odds on other data. For example, Kevin and Stephen, you appeared to read the numbers differently when looking at how provincial and federal government redistribution policy toward the middle class has evolved. Kevin, since you highlighted this, why don’t we start with you and take it from there.

Kevin Milligan

I don’t think there is much disagreement on the facts. Where I see some disagreement is whether policy is going to focus on the middle class. Stephen suggested we should aim policy only at lower income earners. He has often advocated income transfers as the policy tool we should use. I think income transfers are a great way to top-up the incomes of those at the bottom. But as a “catch all” solution to the huge changes taking place in the wage structure of our economy, I think they don’t do the job.

The math just doesn’t work to substantially increase transfers to middle-earners. As Stephen has very capably pointed out, raising income tax revenue at the top is very difficult. Even an extra $10 or $12 billion from raising GST by a couple points wouldn’t work so well. First, you’d have to begin by compensating those in the middle for the new GST they’d be paying. Then, you’d have to use any leftovers to try to boost those middle incomes. It wouldn’t be much. In short, I can’t see how using taxes and transfers alone to compensate for the changes in the middle of the labour market would be possible.

But perhaps this just means we should focus all attention on the bottom and ignore the middle. I don’t think this is a viable path forward, though. If overall economic growth isn’t being broadly felt, then how do we get middle earners to support growth-enabling policies that improve trade, technological progress, and investment? How happy is the broad middle going to be if they hear us say “well, the economy will continue to grow, but your incomes won’t.” My fear is that support for those productive policies will fall if median earners don’t feel like they’re seeing the benefit of economic growth.

Worse, if we advocate nothing but “suck it up, sunshine” for stagnating middle earners, we cede the field to those policy-mongers offering tangibly worse policies to “make life affordable.” (I cringe when I think of a future party platform: “No GST on butter tarts! Making life affordable!”)

So, I think we should be thinking of policies to ensure growth is broadly shared. But even if you disagree with me on that, I think it is unavoidable that the policy world is going to try to help those in the middle—they vote, and there are a lot of them. This means we have to start thinking harder about the question of stagnating middle earners.

Let me throw this back to Stephen: Is your position that we should a) ignore middle earner stagnation or b) that we can do it all with transfers?

Stephen Gordon

Well, changes to the tax-and-transfer system have already engineered a $6,000 increase in median incomes beyond what they might have been. But I agree that the math is unforgiving here: Continued increases in incomes in the bottom two-thirds or the bottom three-quarters of the distribution can only be sustained by continued growth in total incomes. Redistribution from the top can’t do it alone. But the debate starts to look different when you start talking about total incomes.

I keep referring to the U-shaped profile of incomes because that profile is consistent with my preferred narrative of the Canadian macroeconomy of the last 30 years or so. The 15 years up until the mid-1990s were simply dreadful: It was a time of two severe recessions, high and variable inflation, public finances that were out of control, and a tax system that wasn’t particularly growth-friendly. Turning that around was slow, hard work on the part all governments at all levels, and it finally started paying off in the mid-1990s. So I’m a bit nervous about making significant changes in our policy direction; we’ve come a long way and we should be careful not to undo the good work that has been done.

This isn’t really about the middle class per se, of course. But there’s an ongoing problem with which families in the bottom two-thirds or tree-quarters of the income distribution are familiar: The problems that men are having in the labour market. If I recall correctly, around 35 per cent of Quebec men in their 20s do not have a high school degree. I don’t know of any quick fix for this problem, but improving the education outcomes of young men looks to be a win-win result: An increase in total income, that would be concentrated in the bottom part of the distribution.

Erica Alini

A quick interlude here, since we’re speaking about education and boosting total incomes, to mention the special series on productivity in Canada that Econowatch ran earlier this year.

OK, back to the middle class. Mike, do you want to jump in?

Mike Moffatt

I have already expressed my reservations about looking at the middle-class issue from a purely income (or wealth) perspective rather than a welfare one. With that in mind, eyeballing the data, the largest (but far from only) issue does to be an issue of blue collar male wages. I think it would be a mistake to overfocus on this, however. In business school speak, we need to worry about where the puck is going, not where the puck has been. For instance, in the last 40 years we have gone from having 25-30 percent of the workforce in manufacturing to under 12 percent today. That trend cannot continue for mathematics reasons, let alone economic ones. We need to ensure that young men do not fall through the cracks and have access to the education and training they need. But we need to be forward looking.

What type of workers are going to see similar stagnation over the next 40 years? I’ll illustrate my best guess with an anecdote. I recently had some health concerns around tachycardia (excessive heart rate) and possible lifestyle triggers. In the past I would have gotten an appointment with a doctor, who would have probably referred me to a specialist and given me an ECG which would then be analyzed. But instead I was able to take a heart rate monitor used for workouts (which I already owned) and take my own data for a few days, including while sleeping. I discovered that there wasn’t much of an issue, so long as I did not consume too much caffeine at once and kept alcohol intake to a minimum. Concerns alleviated without having to get anyone else involved.

New consumer technologies are released every year that will allow the average person to diagnose their own medical issues. This is a very good thing, I believe it is one of the things that may save the public health care system from a looming demographic bubble. But what happens to all the people who make a living treating health concerns such as mine? This goes well beyond health care, my accounting software is able to do things that ten years ago would have required me hiring a professional. Job loss from the twin factors of technological growth and globalization will not just be for blue collar guys anymore. Your local hospital can feed your chest X-ray into a computer. It may get analyzed by the computer itself, or it may get e-mailed to a doctor in India. Either way, expect the demand for this type of work to fall and wages along with it. That’s why we need to be careful when suggesting that education will ensure higher wages for the middle class. If we educate the next generation of workers to have the type of white collar skills that involve performing a lab test or manipulating an Excel sheet, we may have a very rude awakening.

I don’t think there’s any magic policy that will ensure high wages for the middle class. On the income side, I do think that wages have to be the answer — I think we’ve pushed redistributing to the middle class just about as far as we can go over the last 40 years.  I suspect it will take a suite of policies at the federal, provincial and municipal levels.  Furthermore, I believe we need to be more willing to run policy experiments.  There are a lot of potential policy prescriptions on whose efficacy we won’t have any real knowledge until we try them. Specifically, in my view there are a four broad themes that the policies can take:

1. Productivity. Helping the middle class will be far easier if RGDP (real GDP) is growing at 2-3 per cent per year instead of 1 per cent. In fact, if RGDP is averaging anywhere near 3 per cent a year, this probably ceases to be a problem — strong economic growth plus a declining share of the population working thanks to demographics will ensure wages are high.

2. Not limiting the discussion to income. Much of the issues around the middle class have more to do with fears and anxiety than wages. Worries about crime. Worries about not saving enough for retirement or a child’s education. Now, increasing wages is one way to boost savings, but there are others.  Expanding CPP is an oft-cited example, though I have some reservations here.

3. Eliminating policies that distribute to the rich. We need to examine the various types of corporate welfare we have at the federal and provincial levels. Increasing the length of drug patents, for example; I hope we will be able to avoid including this in any CETA deal.

4. Reducing the cost of living. There are two ways of increasing purchasing power — higher incomes or lower prices. Let’s not ignore the latter. The best way to ensure consumers receive value for money is through competition. Removing interprovincial trade barriers such as the ones on wine, would be a good place to start.

Kevin Milligan

To sum things  up, it looks like Stephen and I agree that we can’t reverse the trends in the middle with transfers alone. Stephen is right, in my view, that several policy developments of the 1990s (among them: stronger commitment to low and stable inflation; stronger commitment to fiscal sustainability) are worth keeping — but I don’t think we reached, circa 1997, a point of insuperable policy perfection. While there is always a danger of unleashing bulls in china shops, there are also costs of inaction. To my mind, the stagnation of a large slice of the labour market is worth action.

But what action? All three of us have highlighted education. I think it is hard to ignore the continued economic benefits of education, and how people with more education tend to suffer fewer job losses during downturns. Calling for more and better education isn’t a novel solution; maybe it’s even a little boring. But the returns to education remain strong — and until I see that start to decline, I’m going to keep pressing that policy button.

Below are three education policy areas of focus that I find important and interesting.

First, Stephen referred to high school drop-out rates in Quebec. He also recently tweeted about the uneven boy-girl ratios at CEGEPs in Quebec. This highlights, to me, that a solution shouldn’t be focused solely on traditional higher education at universities. We need more people finishing high school; more people acquiring useful and sustainable skills. One admirable aspect of the Harper Goverment’s approach to education has been a particular focus on skilled trades. We need more of that as part of the education package.

Second, high school completion and the transition from high school to post-secondary education is another key. Some of the most innovative work in this area is occurring at the Social Research and Demonstration Corporation, where several field experiments are underway examining different aspects of the high school and post-secondary education experiences. One theme emerging from that research is that traditional economic policy levers (like tax credits or subsidies) may need to make more room for policies that influence attitudes, expectations, and information.

Finally, for traditional university students, I think we have to acknowledge that our financing system is a mess. The major tension for post-secondary finance is that students are short of income while studying, but on a lifetime basis do vastly better than those who don’t attend. Some advocates focus too much on the “short of income while studying” part; some critics wag their fingers too strongly on the “lifetime income” part. To my mind, a solution must acknowledge both sides of this tension.

Our current system does a poor job of putting in place the necessary “buy now pay later” structure. There is a lot of room for improvement here — I find the writings of Nicholas Barr from the London School of Economics illuminating for the direction policy should take. Barr emphasizes the tension I mention above between current and lifetime incomes, but gives me hope that better policy design can both enable broader participation and focus public dollars more wisely.

Critics may note that I don’t have a digestible five-point plan, fully costed and focus-grouped. They would be right — I don’t offer myself as a policy guru in this area. I invite more discussion on what I’ve missed and what we could do better — so long as we all acknowledge that this is hard work without easy off-the-shelf fixes. The trends against which we’re trying to push have taken a generation to develop and are global in nature. But I’m confident we can find ways to do better.