$90,000 income means you’re upper middle class—regardless of where you live

Posted on September 25, 2017 in Debates

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NationalPost.com- Full Comment
September 25, 2017.   STEPHEN GORDON

A couple of weeks ago, I pointed out in a column about the upper middle class that an income of $90,000 per year would put you at the 90th percentile of the Canadian income distribution — that is to say, 90 per cent of tax filers had incomes below $90,000. Many responded by saying that this sort of threshold is too reductive: a person earning $90,000 in Calgary is not the same thing as a person in Prince Edward Island with the same income. And of course they aren’t. But I’d argue that these differences don’t matter: both are squarely in Canada’s upper middle class.

Getting a handle on income inequality and related distributional issues is hard, and one of the thorniest complications is the issue of deciding what the appropriate reference population should be. For example, you could point out that median incomes have shown strong growth and that inequality has decreased worldwide over the past few decades (which they have), but a typical Canadian response would be to dismiss those numbers and focus on what has happened to income and inequality measures within Canada. Similarly, you could point out that Canadian median incomes have increased over the past decade (which they have), and someone else will point out that median incomes in (say) Ontario have seen little or no growth. Except, of course, for the regions of Ontario that have seen growth over the past decade. And so on.

If discussions about the distribution of income are to be anything more than a game of shifting the goalposts, then we have to decide on — and stick to — a reference population: whose income matters, and whose don’t? Economists are trained to think that everyone’s welfare matters, but we’re usually obliged to limit attention to the people living within a certain set of political boundaries. So here I’ll limit attention to Canadians.

We are obliged to limit attention to the people living within a set of political boundaries

Let’s compare Calgary and P.E.I. (I’ve chosen them because they have the widest disparity in within-region 90th percentiles). According to Statistics Canada’s Cansim Table 204-0002, it took an income of $128,200 to be at the 90th percentile of Calgary’s income distribution in 2014, but only $74,100 to achieve the same status in P.E.I. An income of $90,000 would put a person well below the 90th percentile in Calgary, and well above that threshold in P.E.I. — if we had decided that the relevant reference populations were Calgary and P.E.I. But if we’re going to remain consistent, the conclusion to be drawn here is that the concentration of high-earning Canadians is relatively higher in Calgary than it is in P.E.I., not that the $90,000 threshold doesn’t apply to those regions.

This leads us to the question of the cost of living. One of the better-known data patterns in economics is the Balassa-Samuelson effect, namely, that consumer prices are higher in regions with higher incomes. This is usually presented as a bit of a puzzle, because market forces should move to equalize prices across markets, so that differences in prices should be mainly explained by transport costs. (Transport costs explain why consumer prices in remote communities are so high, even though incomes are low.) The standard explanation is based on differences in productivity and on the fact that the producers of local goods must offer competitive wages.

And of course, there’s also the cost of housing. The mechanism is different, but the result is the same: everything else being equal, regions with higher incomes will have higher housing costs, simply because there are more people able to pay higher prices. (Of course, it’s not the entire story, because zoning rules and other regulations that limit the supply of housing can also be at work.)

Everything else being equal, regions with higher incomes will have higher housing costs

Set against these higher costs of living in high-income areas are benefits that go beyond the simple fact that incomes are higher there. For one thing, high-income areas are invariably large cities, and people value what large cities have to offer: cultural, recreational and economic opportunities that result from network effects that cannot be reproduced in smaller population centres. Given the choice, many — if not most — high earners would prefer to live in a high-cost, high-income city. Recruiting medical, educational and other professionals to small towns and rural areas is a challenge, even with their low costs of living.

But perhaps even more important is the question of social mobility and the opportunities that high income areas offer to children. As the University of Ottawa’s Miles Corak has recently documented, the chances of a child from a low-cost, rural area reaching the upper end of the income distribution are generally lower than those in high-cost urban area. (This no doubt explains much of the reticence of upper middle class professionals to leave their cities.)

The usual way of comparing the costs of living across regions is perhaps incomplete. Instead, we should be looking at what economists call the “opportunity cost:” the value of the best alternative. From this perspective, the high opportunity cost regions are probably the rural areas that can’t offer the benefits available in the cities.

So yes, there are many things to consider in debates about socio-economic status. But for the upper middle class, it still all comes down to income.

National Post

Stephen Gordon is a professor of economics at Université Laval.

http://nationalpost.com/opinion/stephen-gordon-90000-income-means-youre-upper-middle-class-regardless-of-where-you-live

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