Canadians’ real disposable income grew twice as fast as that of their U.S. counterparts in the last four years, and that trend is set to continue in the post-recession economy, according to new report from CIBC World Markets Inc.

Since 2005, per capita real disposable income in Canada has risen by $2,600, whereas in the U.S. it has risen by just over US$1,300. This is a complete reversal of the trend seen in the 1990s when Canadian income stagnated compared to surging U.S. earnings, CIBC World Markets says.

“So quick was the revival of Canadian income that in a short four year span, per capita real income in Canada was able to wipe out no less than 15 years of income underperformance vs. the U.S.,” says Benjamin Tal, senior economist and author of the report. “In fact, when measured in common currency, real per capita disposable income in Canada relative to the U.S. is now back to the 1990s level.”

The report notes that personal income is derived from four categories: labour income; transfers from government; interest and dividends; and other. The key driver behind Canada’s outperformance was in labour income which saw an 11% increase (inflation adjusted per capita) over the past four years — far outstripping the 2% increase south of the border. In fact, the outperformance of labour income in Canada has accounted for the entire widening income gap between Canada and the U.S. since 2005.

The report uses three factors to determine labour income growth: wage increases; job creation; and the sectoral distribution of employment. “The reality is Canada has outperformed the U.S. in all categories,” notes Tal.

Tal’s research also found that the quality of new jobs was much higher in Canada than the U.S. The number of jobs created in high-paying industries was up by more than 4.5% in Canada but down 4% in the U.S. As a result, the ratio of high-paying to low-paying jobs in the U.S. has fallen by almost 10 percentage points over the past four years while in Canada it remained relatively stable. This difference in the sectoral distribution of employment growth accounted for close to 18% of the increase in the labour income gap between the two countries since 2005.

The report notes that the Canadian performance is even more impressive given that U.S. households enjoyed a significant tax cut and increase in transfer payments from government over the last four years.

Canada also outperformed the U.S. in per capita real disposable income over the past four years in the “other” category (which includes items such as self-employment income), while the performance of income from investment was roughly the same in both countries.

“Even putting aside the strengthening of the Canadian dollar, the Canada-U.S. per capita disposable income gap has widened by six percentage points since 2005,” says Tal. “The chief factor here was the much stronger increases in Canadian labour income which in turn, were boosted by a cocktail of faster job creation, higher wage gains and a healthier sectoral distribution of new jobs in Canada.

Tal notes that there is little doubt that the reversal of fortune in Canadian personal income was largely linked to the recent surge in commodity prices in general, and energy prices in particular. “The broadly based gains in labour income over the past four years (job creation, wage gains and favourable sectoral distribution) suggest that the economic multiplier of higher commodity prices on the labour markets, and thus personal income in Canada, is powerful.

“Our view that the recent retraction in commodity prices is just a correction within a context of rising commodity markets suggests that in the post-recession economy, Canadians will continue to collect more and larger paycheques than their neighbours to the south.”

IE