A combination of tax differences, weaker wage growth and rising self-employment in Canada explains why incomes have risen notably faster in the United States than Canada over the past 40 years, says a report published Monday from CIBC World Markets Inc.
Average real annual disposable income per capita has risen by 1.3% in Canada since 1980, according to the report, lagging the 1.9% growth enjoyed in the U.S. over the same period.
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In dollar terms, per capita disposable income is currently $13,000 higher in Canada than it was in 1980, but is US$25,000 higher in the U.S.
A variety of factors explain the growing income gap, the report says. To start, faster rising taxes in Canada accounts for about 25% of the difference.
Weaker wage growth — real wages rose notably faster in the U.S., the report says — and less favourable composition of job growth in Canada, particularly a shift to self-employment, add to the income gap.
“The vast majority of the increase in self-employment in Canada has been in the form of unincorporated, one-person operations, which on average, earn 75% of the income earned by paid-employees,” the report says.
Another factor is lower growth in government transfers and in interest/dividend and rental income in Canada.
Explaining the growing income gap between Canada and the U.S. is complex, but it’s also “a precondition for any policy initiative aimed at tackling this issue is a clear understanding of the trajectory of the main components that are contributing to this trend,” the report says.