It’s a good idea to get away from daily press reports on the economy from time to time. They focus almost exclusively on what happened yesterday and may happen tomorrow. They rarely pay attention to longer-term trends showing where we come from, where we are going, and what we can do to mend our ways and improve our future.

In this article, I focus on trends in standards of living of Ontario and Quebec, the two provinces that form central Canada, and compare them to the trend in the United States over the last 15 years (1999–2014). This period of half a generation covers a full business cycle. It contains a solid expansion (1999–2008) as well as a recession and slow recovery (2008–2014). It is long enough to reveal basic trends, but short enough to avoid returning to our ancestors.

As an object of study, central Canada has three desirable characteristics: it comprises a good part (55 per cent) of the Canadian economy, it is rather homogeneous economically, and it is not dominated by extractive industries.

One thing at a time: my goal here is more to report on facts than to engage in deep analytical reflection. In conclusion, I offer a few thoughts about the future.

Four sources of the standard of living

The average standard of living of a society is the purchasing power that its members get on average from the income generated by its annual economic production. Statistics Canada calls it “real income per capita.” It is equal to gross domestic product in current dollars (“income”) divided by the price index of final purchases (“real”) and by total population (“per capita”).

For analytical purposes, I break down the standard of living into a product of four canonical sources:

Standard of living = Demography x Employment x Productivity x Terms of trade.

Demography means the percentage of total population with age between the ages of 15 and 64. Since the 15–64 age group is the main source of active workers, an increase in this percentage leads to more production, income and purchasing power per capita – a higher standard of living.

Employment refers to the percentage of this 15–64 population who hold jobs. If other conditions are the same, the larger this percentage, the higher the standard of living will be.

Productivity is the average volume of economic production (constant-price GDP) per employee, which depends on hours worked, educational attainment, available equipment and technologies, and the organization of labour. The more each worker produces, the higher the standard of living will be.

The terms of trade factor for a society is the ratio between the average price at which it sells its production to those in other societies and the average price at which it purchases goods and services from other societies. What we purchase is not exactly the same as what we sell, since we sell exports but purchase imports. The standard of living increases if the average selling price increases more than the average purchasing price.

I examine how each of these four factors has evolved and has contributed to changes in standard of living in Ontario, Quebec and the United States during the 15-year period 1999–2014.

Demography

Figure 1 tracks the 15–64 population as a percentage of total population from 1999 to 2014. In this period, demography has been less favourable to the standard of living in Quebec than in Ontario and the United States, particularly in the last five years. In 2014, for example, there were 3,000 fewer Quebecers in the 15–64 age group than in 2013, while the total population had increased by 61,000. Population aging is also occurring in Ontario and the United States, but later and less dramatically than in Quebec. Statistical agencies foresee a continuation of the decline in the weight of the 15–64 population in all regions over the next decade.

Employment

Figure 2 shows how the employment rate has evolved in the three regions. The U.S. performance has been dismal, particularly in the 2008–09 recession and the following nonrecovery. Ontario was also hard hit by the recession, but has now almost recovered to its 2007 employment rate. Quebec’s performance has been nothing less than spectacular. In 1999, its employment rate lagged six points behind those of Ontario and the United States. Since then, it has increased every year except briefly in 2009, and has now caught up with Ontario’s.

The rise in Quebec’s employment has two main causes: a shallower and shorter recession in 2008–09, and a jump in the employment rate of women aged 15 to 64 from 60 per cent in 1999 to 70 per cent in 2014. The magnitude of the recession in Quebec was made smaller by the absence of an auto industry in the province and the timely launch of the Quebec Infrastructure Plan in 2007–08. The large increase in women’s employment rate came from the supply side: the rise in educational attainment and a string of family policy initiatives that emphasized connections with the labour market, including a low-fee childcare system, enhanced parental leaves, a work premium and the setting of the minimum wage at a stable 45 per cent of the average wage. There was no similar upward trend in Ontario women’s employment rate.¹

Productivity

The productivity of workers depends on two main factors: how many hours they work each year, and how many goods and services (or “output”) they can produce per work hour given their educational attainment, the available equipment and technologies, and the organization of labour.

Figure 3a shows that annual hours per employee declined in the three regions between 1999 and 2014. The decrease was very large in Quebec (10 per cent), sizable in Ontario (6 per cent) and smallest in the United States (3 per cent). In 2014, average annual work hours were down to 1,595 in Quebec, 1,725 in Ontario and 1,791 in the United States. The main drivers were decreases in average hours of full-time workers and increases in part-time work among men, spread across all industrial sectors. The marked preference of Quebecers for shorter weekly and annual work hours is a long-term phenomenon confirmed by these data.

Figure 3b shows that the growth of output per work hour in the two central Canadian provinces has lagged behind that in the United States. Cumulatively, between 1999 and 2014, hourly productivity increased by 25 per cent in the United States, 18 per cent in Quebec and 17 per cent in Ontario. This translates into annual average growth rates of 1.5 per cent in the United States, 1.1 per cent in Quebec and 1.0 per cent in Ontario.

The explanation for productivity growth remains a mystery in the current economic growth literature.² There have, however, been a number of interesting attempts to explain the slower growth of Canadian relative to U.S. productivity illustrated in Figure 3b.

For example, John Baldwin and his colleagues at Statistics Canada have pointed out that small firms, more prevalent in the smaller Canadian economy, are less productive than large firms.³ Andrew Sharpe and his colleagues at the Centre for the Study of Living Standards have suggested that the Canada-U.S. productivity gap could to a large extent originate in the wide Canada-U.S. gap in investment in information and communications technology (ICT).⁴ They point out that annual ICT investment in Canada has been about 40 per cent lower than in the United States since 1987. Peter Spiro, at the University of Toronto, has suggested that the main cause of weak productivity growth in Ontario, particularly in manufacturing, has been weak aggregate demand.⁵ But a synthesis of explanations for lagging productivity growth in central Canada is not yet at hand.

Terms of trade

According to figure 4, between 1999 and 2014 the evolution of terms of trade played cumulatively in favour of Quebec. The main reason is that, while the ratio between international export and import prices increased in both Quebec and Ontario, the increase was much larger in Quebec. Meanwhile, this ratio declined in the United States.

Standard of living

In figure 5, the trends in demography, employment, productivity and the terms of trade pictured in the preceding sections are combined to give the overall trend in the average standard of living of each region from 1999 to 2014. The result is that the standard of living increased cumulatively by 18 per cent in Quebec, 16 per cent in the United States and 11 per cent in Ontario.

Table 1 summarizes the specific contribution of each of the four factors to the cumulative increase in regional standards of living over the period. Differences between regions were mainly due to employment and productivity. The employment rate (row 2) grew remarkably in Quebec, grew slightly in Ontario and declined somewhat in the United States. Productivity (row 3) grew significantly in the United States, grew slowly in Ontario and grew even more slowly in Quebec.

The reason Quebec did better overall than the other two regions is that the province’s employment rate increased so much that it more than offset its very poor productivity performance. Quebec’s productivity was dragged down by the sizable decline in work hours per employee. This largely reflected Quebecers’ fast-rising preference for nonworking time (more part-time employment, shorter work weeks and longer holidays) in this period of declining unemployment.

Output per work hour grew more slowly in central Canada than in the United States. But in Ontario the employment rate increased only slightly and thus could not, as in Quebec, close the gap with fast-growing productivity in the United States. Hence the relatively slow increase in Ontario’s standard of living.

Real personal disposable income per capita

The concept of standard of living, or real income per capita, is all-inclusive. It comprises all types of income (GDP) that are generated in the national or regional territory. Real personal disposable income per capita is a more limited concept of income per capita. It includes about 60 per cent of GDP in Quebec and Ontario, and a bit more in the United States. Real personal disposable income is that share of GDP distributed to households (persons) as labour, investment and transfer income, net of personal income taxes. It is income at the disposal of households to consume or to save. It excludes the investment income paid out to foreigners, the profits firms retain in order to reinvest in structures and equipment, and the net income (taxes less transfers) governments can spend to provide public goods and services such as national defence, health care, education and transport.

Figure 6 shows that, from 1999 to 2014, real personal disposable income per capita increased cumulatively by 33 per cent in Quebec and 23 per cent in Ontario and the United States. The Quebec advantage in growth of general standard of living between 1999 and 2014 (figure 5 and table 1) is also evident in growth of real personal disposable income per capita during the period.

A few thoughts on the future

It is not possible to draw firm conclusions about the future of the standard of living from its trend over the past 15 years. The future is uncertain. However, among the four sources of increase in the standard of living, we have a reasonably good idea on what to expect from demography – from Statistics Canada for Ontario and Quebec, and from the OECD for the United States.

This suggests looking at projections for, say, the next decade. I take existing demographic projections for 2014–2024 as given. I assume the other three sources of standard of living (employment, productivity and the terms of trade) change at the same average annual rate as they did over the past 15 years. The results of this projection are reported and compared to actual data for 1999–2014 in table 2.

The major development over the next decade is that the population dependency ratio will increase rapidly in all three regions, with Quebec in the lead and Ontario and the United States not far behind. It can readily be seen in table 2 that, other things being equal, the declining weight of the 15–64 population will slow the average annual growth rate of real income per capita (the standard of living) by 0.6 or 0.7 of a percentage point everywhere (the difference between line 3 and line 1, or between line 4 and line 2). A smaller percentage of the population will be at work, provide individual care and pay taxes to support a rising tide of the nonworking and increasingly old in the population.

Since little can be done to move the terms of trade in a favourable direction – they are like international “acts of God” – any offset to the demographic brakes will have to come from faster-rising employment rates and productivity.

The first principle in this endeavour is to make sure that the macroeconomic environment is conducive to full employment of human and material resources. So, first, we must make every effort to adopt monetary and fiscal policies that avoid recessions and support recoveries.

Then, on the employment side, we must deal more effectively with the high school dropout rate, increase educational attainment, help immigrants integrate more quickly into the labour force, and remove obstacles to women and older people joining and staying in the work force. These are obvious directions for public policy to take.

It is trickier to find policy that accelerates productivity growth. There is an array of options but no silver bullet in this area. A few elements that deserve mentioning are: develop entrepreneurship and managerial talent in general, combat monopolies, support new free-trade initiatives and protect existing agreements, encourage expansion of Canadian multinational firms, revise the equity and effectiveness of research and development tax credits, examine alternative ways of organizing health care and social services, repair and expand public infrastructures, replace group- and sector-specific tax breaks and credits with more general taxation rules, and tax consumption more and investment less.

There is room in central Canada for faster – and, of course, more inclusive and sustainable – economic growth. In absolute levels, Quebec and Ontario are more or less on par in productivity and standard of living, but they both lag about 15 per cent behind the United States in these two dimensions. So, even in a global environment that may not be favourable to growth, central Canada could show a better than average performance simply by catching up with the United States. This is particularly true in innovative sectors such as information and communication technology, where the central Canada–U.S. productivity gap is currently largest. Continue reading “Taking the long view” →

When Jean Lesage and his équipe du tonnerre came to power in 1960, two thirds of young adults in Quebec didn’t have high school diplomas.¹ Throughout the 1950s the Quebec economy had surfed on the global postwar expansion, but Quebec had not been able to narrow the 20 per cent gap between its standard of living and that of neighbouring Ontario.² Although francophones made up 80 per cent of Quebec’s population, only 47 per cent of Quebecers were employed in francophone-owned businesses.³ When writer Pierre Vallières called French Canadians the “white niggers of America” in 1968, he was widely dismissed for making a ridiculous overstatement. In fact, he was telling the truth. In 1960, French-origin men earned less relative to British-origin men in Quebec (52 per cent) than black men did relative to white men in the United States (54 per cent).⁴

To his credit, Lesage insisted that improving the relative economic position of francophone Quebecers was urgent. Here is an excerpt from his April 1962 budget speech:

We constitute an ethnic minority that has been able to survive till now, but whose material power is far from corresponding to that of our English compatriots. In certain fields, we have accumulated the delays of at least one generation. It is for this reason that we have so much to accomplish today and that we have to realize it so quickly. We possess a common lever, the state of Quebec. We would be guilty if we did not use it … The needs of our people can be grouped in three categories: those that arise from the effort that we should make in matters of education and culture, those that arise from the necessity of increasing the welfare and health of our population and those that are connected with the development of our economy.⁵

Lesage used the provincial government to achieve four goals:

• raise the general level of schooling,
• accelerate economic development,
• share the increased income widely, and
• improve the relative economic position of francophones.

With the passage of half a century, it is a good time to ask whether the goals of the Quiet Revolution have been broadly achieved. In sum, the answer is yes.With the passage of half a century, it is a good time to ask whether these goals have been broadly achieved. In sum, the answer is yes. In what follows, I lay out evidence that the goals have been realized, largely as a result of the active role played by the Quebec provincial government during and after Lesage’s terms in office. At the end, I mention a few areas where more progress has to be made, and a number of new problems that remain to be addressed.

Quebec government activity has expanded greatly

Lesage’s deeds matched his words. A long-delayed set of accelerated changes took place during his two terms in office from 1960 to 1966. Political scientist Dale Thompson was the first to describe this as the Quiet Revolution.⁶ This period has left a lasting imprint on Quebec’s institutions and shaped the culture of the entire generation of baby-boomers that was entering adult life in the 1960s.

Beginning in 1960, government activity increased rapidly. The provincial public service was modernized and allowed to unionize and expand. Education and health were secularized, professionalized and centralized. New programs were launched, such as hospital insurance (a federal-provincial shared-cost program), school allowances and the Quebec Pension Plan. Regional high schools were launched throughout the province. A host of state enterprises were created, such as the Société Générale de Financement (SGF), the steel company (Sidbec), the Société Québécoise d’Exploration Minière (SOQUEM) and the Caisse de Dépôt et Placement du Québec (CDPQ). In 1963, all large private power companies were nationalized, enabling the old Hydroelectric Commission to be transformed into modern-day Hydro-Quebec.

From 1960 to 1966 provincial government expenditures and tax revenues tripled, while gross domestic income increased by 65 per cent. The rapid change in institutions coupled with the sharp increase in the tax burden generated a voter backlash that led Lesage to electoral defeat in 1966. Out went “Ti-Jean la taxe,” as he was called during the campaign.

Nevertheless, after 1966 the new Union Nationale Premier, Daniel Johnson, Sr., and his successors decided to carry on with the Quiet Revolution. From 1966 until today, Quebecers’ lives have been changed by family allowances, health insurance and social assistance (two additional federal-provincial shared-cost programs), the development of Cégeps, many more new state enterprises (SOQUIP, SOQUIA, REXFOR, Loto Quebec, National Asbestos Corporation, Madelipêche, Nouveler, Quebecair, among others), the James Bay hydroelectric project, language legislation to protect French within the province, no-fault automobile insurance, provincial economic summits, many forms of financial assistance to business, a few privatizations, support for the Free Trade Agreement with the United States, a large number of tax credits, and a new wave of social programs in the 1990s.

Figure 1 summarizes the impact all these measures have had on total provincial and local government (P&L) expenditure from 1961 to 2007.⁷ From 13 per cent in 1961, Quebec’s P&L spending increased to 34 per cent of GDP in the mid-1980s, and it has hovered around this level ever since. From the same starting point in 1961, Ontario’s P&L spending has stabilized around 24 per cent of provincial GDP, 10 points below the Quebec statistic. Put another way, Quebec’s P&L expenditure in 2007 was $30 billion more than if the province had spent at the same rate as Ontario.⁸ Consistent with its high ratio of P&L spending to GDP, total taxes paid by Quebecers to all levels of government amounted to 38 per cent of GDP in 2008, compared to 30 per cent in provinces other than Quebec.

An interesting question is how much of the excess of Quebec’s P&L spending over the national average has been financed from own-source revenues and how much has come from above-average federal transfers. The answer for 2007 is that 84 per cent came from own-source revenues and 16 per cent from above-average federal transfers.⁹ In contrast, for the three Maritime provinces, 5 per cent of above-average P&L spending came from own-source revenue and 95 per cent from above-average federal transfers.

Quebec’s educational attainment now matches the national average

How effective has expanded government activity been in helping Quebec achieve the goals set by Lesage? Table 1 shows that Quebec’s average level of schooling was more than a year under the national average 50 years ago; by 2001 it had closed the gap.

Table 2 compares educational attainment of the 25−44 population in Quebec and Ontario, the best-performing province. Basically, Quebec is weaker in the tails, but it is stronger in the middle. First, Quebecers are more likely to lack a high school certificate than Ontarians (11 vs. 7 per cent). This is particularly significant since it takes 11 years to complete high school in Quebec and 12 in Ontario. Second, a smaller percentage of Quebecers than Ontarians hold university degrees (30 vs. 34 per cent). However, Quebecers are in the lead at the trades and college level (43 vs. 35 per cent), which includes vocational, college and technical studies. As a result, the probability of having some form of postsecondary training beyond high school is higher in Quebec than in Ontario (73 vs. 69 per cent).

What about the quality of education? Table 3 summarizes the evidence from the 2009 study of student skills at age 15 conducted by the OECD Programme for International Student Assessment (PISA). It turns out that youth from the four largest Canadian provinces (including Quebec) are doing well in reading, mathematics and science relative to those from the United States and other countries. Among provinces, Alberta is first in reading and science, and Quebec is the best in mathematics.

To sum up, while the quantity and quality of education in Quebec can still be improved, among Canadian regions the province is no longer the laggard it was 50 years ago when Lesage launched the Quiet Revolution. Moreover, since education is a provincial responsibility under the Canadian constitution, credit for closing the educational gap lies essentially with the policies and institutions Quebec itself has put in place over the last 50 years. Major challenges remain: reducing the high school dropout rate (among francophone boys in particular) and increasing the university graduation rate further.

Quebec’s standard of living has caught up with Ontario’s

A key concern of Premier Lesage was economic development. His objective was to develop the economy so that Quebec’s standard of living could one day catch up with that of its “English compatriots.” Has this challenge been met in the last 50 years?

Figure 2 answers this question affirmatively, taking Ontario as the economic reference as most public documents did in the 1960s. It shows that Quebec’s standard of living increased from 81 per cent of Ontario’s in 1961 to 96 per cent in 2009.¹⁰ During the first 30 years, progress was slow and rocky. In particular, the temporary “bubble” in 1976−84 was a consequence of the James Bay megaproject. In 1989, the Quebec/Ontario ratio was 85 per cent, still only 4 points above the 1961 level. But over the next 20-year period, Quebec gained 11 points, reaching 96 per cent in 2009. The remaining 4-point gap can be explained by the fact that Quebecers choose to work fewer hours per capita than Ontarians. They have shorter work weeks, more holidays, more leaves and longer vacations, and they retire earlier. La joie de vivre is a choice that has a cost. But in a basic sense, the two provinces are on a par in standard of living.

The surge in Quebec’s relative standard of living after 1989 is not the result of fast-growing output per worker (productivity), but of rapid increase in the employment rate (proportion of people aged 15 and over with jobs). Quebec’s employment rate increased from 86 per cent of Ontario’s in 1989 to exact parity with Ontario’s in 2010.¹¹ Given the close connection between rising educational attainment and employment, and given that it requires decades to raise the education level of an entire population, much of this development can be seen as a delayed consequence of the Quiet Revolution. The “culture” of the Quiet Revolution has also produced progressive legislation such as low-fee childcare and the Parental Insurance Plan. Both programs are popular and have pushed Quebec women’s labour force participation in the 25−54 age group above the national average.¹² Another “cultural” factor to appreciate is that, after a string of major labour conflicts between 1972 and 1983, Quebecers have now learned to manage peacefully the system of industrial relations put in place by the Quiet Revolution.

Given that from now on aging will reduce the employed fraction of Quebec’s population, future advances in standard of living will crucially depend on what happens on the productivity front. So far, Quebec’s performance on this score is not impressive. Although currently 5 per cent higher than Ontario’s,¹³ its productivity level is 16 per cent lower than that of the United States. It is also far behind productivity levels of countries such as France, Germany, Norway, the Netherlands and Belgium.

There is less poverty and income inequality in Quebec than elsewhere

“Increasing the welfare and health of our population” was another stated objective of the Lesage government. How successful has Quebec been in building its welfare state since then?

According to data reported in table 4, Quebec has arguably become the most egalitarian society in North America. Whether in absolute or relative terms, there is generally less poverty in Quebec than elsewhere in Canada and the United States. Among Canadian provinces, only Alberta has an absolute poverty rate (7.4 per cent) lower than Quebec’s (8.5 per cent). This difference is small in view of the fact that real income per capita in the oil-rich province is 60 per cent higher. Broad measures of income inequality reported in table 4, such as the Gini coefficient and the top 1 per cent income share, give the same message: there is less inequality in Quebec.

The fact that there is less poverty and income inequality in Quebec – even as the province is far from being one of the richest jurisdictions in North America – suggests that its tax/transfer system must, by design, be more redistributive than that of other jurisdictions. Table 5 shows that this is indeed the case. The two left-hand columns report that market income for the lowest quintile is lower in Quebec than in other provinces. However, once government transfers are added and income taxes subtracted, the poorest 20 per cent wind up with greater purchasing power in Quebec than in other parts of the country.¹⁴ The implication of this redistributive effort is that Quebec’s income tax system must be more progressive. This is illustrated by the two right-hand columns of table 5: among the highest-earning fifth of Quebecers and Canadians overall, both groups pay the same tax rate (21 per cent), despite Quebecers’ market incomes in this group being 15 per cent lower.

Quebec’s tax, transfer and social policies have their roots in the Quiet Revolution of the 1960s. They reflect Lesage’s vision as well as the shared social democratic bent of his Liberal and Parti Québécois successors. Even as the welfare state was pronounced dead in conservative circles around the world in the 1990s, Quebec’s état providence was beginning a second life with a new wave of social programs such as universal drug insurance, low-fee childcare, extended parental leaves, new family allowances and pay equity. Given population aging and the current state of public finances, the challenge from now on will probably be to pay for and maintain these programs rather than to adopt new ones.

The relative economic position of francophones has been normalized

Lesage was concerned not only with economic development of Quebec overall, but with the relative position of francophones within the province. Has their position improved in the last 50 years?

Unambiguously yes. There are two dimensions to consider: relative earnings and business ownership. On the first, table 6 reports that 2000 earnings of Quebec francophones were equal to or greater than earnings of anglophones of the same gender, language skills, level of education, number of years of experience and number of weeks worked. This is a far cry from the 52 per cent ratio of wages of French-origin to British-origin men in Quebec in 1960. Faster economic integration of allophones, particularly those who are unilingual, remains a major challenge.

On the second dimension, François and Luc Vaillancourt have estimated that francophone-owned businesses in Quebec increased their share of provincial employment from 47 per cent in 1961 to 67 per cent in 2003.¹⁵ They found that foreign control over provincial employment was 10 per cent. This implies that, foreign-owned firms aside, 75 per cent of domestic Canadian control over Quebec employment derives from francophone-owned firms – not far from the francophone percentage in Quebec’s population (80 per cent). Taking foreign ownership as a given, Quebec francophones have become maîtres chez eux.

Challenges remain, and new ones have arisen

Fifty years ago, Jean Lesage launched the Quiet Revolution. His basic goal was the modernization – the mise à jour – ofQuebec society. He wanted to use the provincial government to raise the level of schooling, accelerate economic development, share the increased income widely and improve the relative economic position of francophones.

The origin of progress can be found in the Quiet Revolution − in the culture and institutions it put in place in the first half of the 1960s, and in the inspiration it gave Lesage’s successors.The goals Lesage set out have been met to a large extent. Government activity has expanded greatly; educational attainment is up to the national average; the standard of living has caught up with Ontario’s; there is less poverty and income inequality than elsewhere in North America; and the relative economic position of francophones has been normalized. In each case, the origin of progress can be found in the Quiet Revolution − in the culture and institutions it put in place in the first half of the 1960s, and in the inspiration it gave Lesage’s successors. There is no question that national and international factors have simultaneously influenced Quebec’s evolution during the last half century, but the conclusion that the Quiet Revolution has played a cardinal role is inescapable.

Naturally, there is more to accomplish. In education, there remain the important tasks of reducing the high school dropout rate (particularly for francophone boys) and increasing the university graduation rate. In the economy, the main challenges are to increase productivity (while showing respect for the environment), remain a sharing society, pay the bills of existing programs before adding new ones, and facilitate the economic integration of immigrants and Aboriginals.

There are also new problems to address. Lesage had high hopes for what the “state of Quebec” could accomplish. And indeed the provincial “state” has helped Quebec reach the goals Lesage set out. But 50 years later, the reach of the provincial government into every corner of Quebec life has become a cause for concern. Although more peaceful than in the 1970s and 1980s, labour relations in the public sector are still very adversarial. Administrative, professional and union bureaucracies block the slightest proposed change in the health and education sectors. Bridges and overpasses threaten to collapse, and human lives have been lost in a few incidents. Too many teenagers drop out of high school. Timely access to health care seems out of reach despite billions of additional dollars being poured into the sector each year. Public construction projects are rarely completed on schedule or within budget. Rumours of corruption in politics and construction are widespread. Interest group lobbyists are everywhere, extracting maximum benefits for their clients at the expense of taxpayers. The government is the wet nurse of businesses and the Santa Claus of regions. Large protected sectors such as electricity, agriculture, health and construction post disturbingly high production costs.

Welcome to the 21st century.

Continue reading “Quebec’s Quiet Revolution, 50 Years Later” →

There is less poverty and less inequality in Quebec

In the Winter/Spring 2009 issue of Inroads, I reported that Quebec and Ontario are just about on a par in standard of living. Quebec’s real income per capita is 92 per cent of Ontario’s. But Quebecers enjoy more free time, much of it by free choice: they work fewer hours per week, fewer weeks per year and fewer years in their careers. Incorporating the value of the increased leisure time together with cash income into an overall estimate of “true” standard of living leads to one basic conclusion: the average standard of living is now about the same in Quebec as in Ontario.

This result comes with a second surprise: among regions of Canada, Quebec is a leader in the fight against poverty and inequality. In this article, I elaborate on this fact and suggest a few explanations.

Poverty versus inequality

Poverty and inequality are not the same thing. Poverty refers to the lack of resources of people who live at or near the bottom of the income scale. The poverty rate is the percentage of the population living below some low-income threshold. A popular choice of threshold is a disposable income level equal to, say, 50 per cent of median disposable household income. The resulting measure of poverty is a relative poverty rate. Whether a household is poor or not is determined by how large its income is relative to the median.

An alternative choice of threshold is a disposable income level equal to the cost of a fixed basket of goods and services thought to be necessary to sustain some minimum standard of living. This time, the poverty threshold does not move up or down with median income, but simply tracks the cost of the fixed minimum basket. Most people would consider a below-the-line income as indicative of absolute poverty. Both relative and absolute poverty rates are useful, depending on exactly what concern is being addressed. In industrial countries, measured poverty rates usually range from 5 to 20 per cent of total population.

Income inequality, on the other hand, refers to how unequally income is distributed among members of society above as well as below the median. A standard measure of income inequality is a decimal called the Gini coefficient. For disposable household income, this takes on values that usually range from 0.20 (very little inequality) to 0.50 (very pronounced inequality). Even though inequality and poverty are different concepts, it is nevertheless true that countries where inequality is greater also usually have greater poverty.

International comparisons

Table 1 compares the statistics on relative poverty and income inequality produced by the Luxembourg Income Study (LIS) for eight selected countries. (No comparisons of absolute poverty between countries are available.) Provincial data for five Canadian regions are added to the list. The highest poverty rates and Gini coefficients for inequality are found in Anglo-Saxon countries, with the United States in the lead. Measures of relative poverty and inequality in southern European countries such as Italy are similar to the Anglo-Saxon figures. The lowest poverty rates and Gini coefficients worldwide are found in western Europe and Scandinavia.

Internationally, Canada ranks in the middle. Table 1 shows that the country as a whole does better than the United States, Britain and Italy, but worse than France, Germany, Sweden and the Netherlands. Perhaps more surprisingly, it also reveals that, within Canada, Quebec has a better record on relative poverty and income inequality than any other region. It is this result that I will now discuss. I will first focus on poverty – relative and absolute – and then on broader income inequality.

Poverty in five Canadian regions

Figure 1 extends the Quebec/Canada comparison of relative poverty back to 1987. Two facts stand out. First, for at least two decades the incidence of relative poverty has been lower in Quebec. A smaller fraction of the population lives with less than 50 per cent of median disposable income in Quebec than in the country as a whole. Second, Quebec’s advantage has increased since the mid-1990s. Relative poverty has declined significantly more in Quebec than elsewhere. In 2006 compared to ten years earlier, relative poverty was down slightly by one point to 11.4 per cent in Canada, but down markedly by 2.5 points to 9.0 per cent in Quebec. A third fact (not illustrated in the chart) is that the depth of relative poverty is smaller in Quebec. Incomes of poor people are closer to the poverty line on average in the province than in other parts of the country. Taking 2006 as an example again, one finds that low incomes actually fell short of the relative poverty threshold by 28 per cent on average in Quebec and by 33 per cent in Canada as a whole.

Table 2 shows that there is also less absolute poverty in Quebec than in other regions of Canada. The reported incidence of absolute poverty in Quebec in 2006 was 9.8 per cent. This was lower than in every other region except the prairies. Second, in the same year the depth of absolute poverty – the average gap between incomes of those who are poor and the poverty line – was smaller in Quebec than in any other part of the country, including the prairies. Combining incidence and depth leads to the conclusion that there was broadly less absolute poverty in Quebec than anywhere else.¹

How important is the support that government transfers provide to the disposable income of poor families? Table 3 tries to answer this question by looking at how much the tax-and-transfer system contributed to incomes of families in the lowest quintile of disposable income in 2006. The net contribution of transfers (net of taxes) to disposable income in this group was $6,100 nationally and $7,500 in Quebec. As a result, even though Quebec’s before-tax-and-transfer (or market) income was 13 per cent below the national average, its after-tax-and-transfer (or disposable) income was slightly above average.²

The level of government transfers could be expected to decline as market income increases. This is not the case here: average transfers (net of taxes) were the same in Quebec as in Atlantic Canada ($7,500) in 2006 even though average market income was $1,100 higher in Quebec. Given that the same federal transfer programs apply in every region, this can be taken as evidence that provincial transfers do make a difference in Quebec.

And they do. There have been important developments in Quebec social policy since the mid-1990s: the continued expansion of social spending, universal drug insurance, low-cost public daycare, increased provincial family allowances, the addition of a working income tax credit on top of the federal program and the decision to stabilize the minimum wage at around 45 per cent of the provincial average hourly wage all come to mind. Some of these measures have benefited all families, but they have had a larger favourable impact on low-income families. To underline the importance of fighting poverty, the National Assembly unanimously adopted an Act to Combat Poverty and Social Exclusion in 2002.

Income inequality in five Canadian regions

Turning to the question of income inequality, Figure 2 gives the broad picture by tracing the Quebec/Canada comparison of Gini coefficients for disposable household income back to 1987.³ Three observations can be made. First, income inequality has been less in Quebec than in the country as a whole for at least two decades. Second, in the second half of the 1990s inequality increased everywhere in Canada, including Quebec, before stabilizing at a higher level in the 2000s. Third, this increase has been more moderate in Quebec than in any other region, so that the difference in inequality between Quebec and the rest of the country is now wider than ever.

Why is there less income inequality in Quebec? The most important reason is that the tax-and-transfer system achieves a relatively large reduction in inequality in the province. We have already noted that, below the median income, Quebec has fought poverty with more success than elsewhere. More broadly, Table 4 shows that, even though before-tax-and-transfer income inequality (as measured by the Gini coefficient) is larger in Quebec and Atlantic Canada than elsewhere, after-tax-and-transfer inequality is smaller in those two regions. In other words, the tax-and-transfer system achieves a greater reduction of inequality in Quebec and Atlantic Canada.

It should be noted, in particular, that income taxes are more progressive in Quebec than in any other region of Canada. While the average tax rate for the middle income quintile was about the same in every region in 2006 (16 per cent), the average tax rate for the highest quintile was higher in Quebec than in any other region. It was 26 per cent in Quebec and ranged from 22 per cent to 24 per cent elsewhere.

It is also worth noting that before-tax earnings inequality by quintile is less pronounced in Quebec than in the rest of the country. This conclusion can be drawn directly from Figure 3 (on page 64). Quebecers in the first earnings quintile earn more, and those in the second and higher quintiles earn less, than other Canadians. Moreover, and crucially, the higher the position you occupy in the Quebec wage hierarchy, the more your earnings fall short of the earnings of Canadians of similar ranking in other regions. The reasons for this are not yet clear. What we know is that for many years the provincial policy environment in Quebec has been supportive of low-wage earners through the minimum wage and other labour standards, pro-union legislation, public sector wage agreements, social transfers, etc. But noneconomic factors such as the particular way in which a climate of trust and fairness is established in business and government organizations could also be at play.

What about top earnings? Emmanuel Saez, of the University of California at Berkeley, and Michael Veall, of McMaster University, have found that in 2000 the top 1 per cent of wage earners absorbed 6.5 per cent of total wage income in francophone Quebec, 14 per cent in anglophone Quebec, 11.2 per cent in all other Canadian provinces and 12.7 per cent in the United States.⁴ In other words, runaway earnings are not a characteristic of very-high-wage earners in francophone Quebec to the same extent as in the rest of North America. The top 1 per cent of wage earners earned on average 35 per cent less in Quebec than in all other provinces in that year. The sources of this difference between francophone Quebec and the rest of the continent are not really understood yet.

The fact, reported by Figure 2, that disposable income inequality increased in all parts of Canada (Quebec included) in the second half of the 1990s is well known. What happened is that before-tax-and-transfer (market) income inequality increased sharply and permanently by about four Gini points in the early 1990s. For a while, until the mid-1990s, this was entirely offset by a matching increase in the equalizing impact of the tax-and-transfer system. But in the second half of the nineties this equalizing force weakened, which allowed an increase of after-tax-and-transfer (disposable) income inequality of three Gini points to emerge.

The sudden persistent increase in family market income inequality in the early 1990s and the decline in the equalizing impact of the tax-and-transfer system since then – throughout Canada – have been the subject of intense research in recent years. Several causal factors have been singled out, such as the growing gap between the top and the middle of market income distribution, changes in family life and cuts in taxes on higher incomes and in social assistance.⁵ The fact that the increase in disposable income inequality has been more moderate in Quebec certainly owes something to the fact that top earnings have not been as exuberant as elsewhere, and that provincial income taxes and social spending have not declined by as much.

Yes it works

My main purpose in this short essay has been to establish the fact that, among Canadian regions, Quebec is a leader in the fight against poverty and inequality. I also wanted to make clear that the province has not achieved this position by chance. Over the last few decades, it has shown consistency and persistence in this endeavour by adopting a sequence of determined and purposeful laws and measures, including the 2002 Act to Combat Poverty and Social Exclusion. Quebec, in other words, has passed the stage of yes we can and can claim that yes it works.

Furthermore, the Quebec experience demonstrates that fighting poverty and inequality can be effective and successful without impairing the growth and employment creation process. It offers another counterexample – a North American one – to Arthur Okun’s pessimistic assertion that there is an insuperable tradeoff between “equality and efficiency.”⁶ It is all the opposite: in the long run, a less unequal society will by definition allow more of its members to enjoy prosperity and freedom and will not be cursed by widespread envy.

Continue reading “Quebec is Fairer” →

In their reaction to my two recent pieces on the Quebec economy, François Vaillancourt and Mathieu Laberge begin by saying they agree with me that “Quebec has a more equal distribution of income than other Canadian provinces,” but disagree “that Quebec is doing well economically that the standard of living in Quebec is adequate.”¹

Concerning Quebec’s overall economic performance, I made two carefully worded statements: that “Quebec is … on a par with Ontario in standard of living” and that “both provinces (and many others) lag behind the United States economically.” I saw the second as being the real problem. Far from saying that Quebec is doing well economically or that the standard of living in Quebec is adequate, I argued the exact opposite. After observing that per capita real income was substandard in both Quebec and Ontario, I concluded that their common gap with U.S. per capita income would have to be bridged “through faster productivity growth everywhere in Canada.” My point was that there was a problem, namely lagging productivity, but that it was a Canadian problem, not a Quebec-specific problem.

Is Quebec less productive?

Following their opening statement, Vaillancourt and Laberge go on to examine measures of economic success. They calculate that in 2008 – the last year of the most recent economic expansion – the current-dollar value of total money income (or gross domestic product, GDP) per capita in Quebec was 82 per cent of that in “the rest of Canada.” From this they infer that Quebec is “less productive than most other provinces.” That inference is incorrect.

In recent years, there have been sharp differences in economic performance across provinces. These differences are highly correlated with shares of oil and gas extraction in provincial GDP. Column 1 of Table 1 classifies provinces according to this criterion. In the last year for which data are available (2006), the three provinces of Newfoundland, Saskatchewan and Alberta drew between 18 and 32 per cent of their total money income (GDP) from oil and gas extraction (multiplier effects not included). In contrast, the GDP share of this industry in each of the seven other provinces was small or negligible.

Column 2 of the table then compares provincial levels of per capita GDP in 2008. The results are striking. In that year, the three extractive provinces generated levels of per capita GDP that were between 29 and 69 per cent above the national average. This is partly because oil and gas extraction is highly capital-intensive, and partly because oil and gas prices were high in that year.² In all other provinces, levels of per capita GDP were between 5 and 31 per cent below the national average. Quebec fell short of the average by 19 per cent.

Per capita GDP is the most comprehensive measure of average money income we have. However, true standard of living depends not only on money income (GDP), but also on the average cost of what that money income can buy. This is not an insignificant observation when provinces are compared.

For example, column 3 of Table 1 shows that in 2008 the average consumer price level was 5 per cent below the national average in Quebec, but 7 per cent above the average in Ontario. Column 4 further shows that, when money incomes are adjusted to take account of these provincial differences in absolute price levels, the resulting per capita real income (or purchasing power) stands at 85 per cent of the national average in Quebec, and 88 per cent in Ontario – not a big difference. And furthermore, given that workers enjoy more free time in Quebec than in Ontario and other provinces (column 5), the conclusion I arrived at in the Winter/Spring 2009 issue of Inroads, that “Quebec is … on a par with Ontario in standard of living,” immediately follows.³ This evidence shows that Vaillancourt and Laberge’s statement that Quebec is “less productive than most other provinces” lacks generality.

Note that it is the autonomous standard of living – before federal equalization payments are added to Quebec income – that is about the same in Quebec as in Ontario. This obviously raises the question of why Quebec is nevertheless a net recipient of federal equalization. The answer is that equalization payments to a province are based on its relative fiscal capacity, which is a complex measure that is correlated with current-dollar per capita income (with many adjustments). In 2008, Quebec’s current-dollar per capita income was 81 per cent of the national average (column 2). This was low enough to entitle the province to significant equalization payments. The equalization formula makes no adjustment for such considerations as relative provincial price levels or the value of leisure time. The question of whether these aspects should be taken into account is important, but I will leave it to future discussion.

Is personal disposable income a good indicator of the standard of living?

Vaillancourt and Laberge view personal disposable income (PDI) per capita – the source of private consumption – as “a good indicator of the standard of living.” I disagree. Per capita PDI is a very restrictive indicator of well-being. In 2008, personal disposable income accounted for only 59 per cent of total money income (GDP) accruing to Canadians. Left out are government disposable income (taxes less transfers), which finances public consumption and investment, and corporate disposable income (undistributed profits), which is a major source of private investment. By all means, these are key components of income and the standard of living.

In Canada, public consumption (government-supplied goods and services) amounted to 37 per cent of private consumption in 2009, and it is thus a large component of total consumption. And without public and private investment, you could not count on maintaining and expanding future consumption opportunities. Most people would reject as unduly restrictive the view that the only component of total money income that is a significant contributor to well-being is that part (PDI) which is the source of private consumption.

The last column of Table 1 compares provincial levels of PDI per capita in 2008. It turns out that while Quebec’s per capita GDP was only 81 per cent of the national average (column 2), its per capita PDI was 89 per cent of the average (column 6). In other words, its per capita PDI was closer to the national average than its per capita GDP. Vaillancourt and Laberge explain that this result is due to the province’s dependence on equalization payments. Their view is much too narrow.

Comparing the results in columns 2 and 6, a clear pattern emerges. Where oil and gas extraction is significant, per capita GDP is higher relative to the national average than per capita PDI; where oil and gas extraction is small or negligible, the opposite holds true. The reason is simply that the main source of variability of GDP across provinces in recent years was corporate profits. In 2008, corporate profits in the three extractive economies were a whopping 24 per cent of GDP on average; in the seven nonextractive economies, they were a modest 10 per cent of GDP.

Since corporate disposable income is part of GDP, but not of PDI, the distribution of provincial outcomes around the national average was much tighter for per capita PDI than for per capita GDP. If you were an extractive economy, so that your per capita GDP was above the national average, then your per capita PDI was also above the average, but by less; and if you were not an extractive economy, so that your per capita GDP was below the average, then your per capita PDI was also below the average, but by less. Columns 2 and 6 of the table show this to be true not only for Quebec, but for all provinces.

Nobody will deny that federal equalization and transfer payments had an impact on PDI. Without them, in 2008, per capita PDI in Quebec would probably have stood at 88 per cent of the national average instead of the actual 89 per cent.⁴ But there is no way that this factor alone can explain the 8-point gap between the relative per capita PDI of 89 per cent (column 6) and the relative per capita GDP of 81 per cent (column 2). By insisting that the gap between these two ratios essentially arises from the generosity of the federal tax and transfer system, Vaillancourt and Laberge omit the most important part of the story.

What public policies should Quebec pursue?

In the remainder of their article, Vaillancourt and Laberge suggest a number of public policies that could free up resources, foster productivity and ensure economic growth in Quebec. These include reducing the use of labour taxation and subsidies to capital investment; pricing publicly supplied goods and services such as electricity, postsecondary education and drug insurance more efficiently; and restoring fiscal sustainability by reducing the provincial public debt. Their list of growth-enhancing policies is obviously just a beginning,⁵ but it makes good sense and I agree with it.

But they sometimes push their case too far. Their statement that “Quebec’s abundant hydroelectric capacity should be the equivalent of oil” is correct in a qualitative sense, but clearly not in a quantitative sense. According to the data in column 1 of Table 1, in 2006 oil and gas extraction accounted for about one third of aggregate value added (GDP) in Newfoundland, one quarter in Alberta and one fifth in Saskatchewan. For electricity power generation to play a similar role in Quebec quantitatively, its value added would have had to range between $45 and $85 billion in that year. In fact, the actual value added of the Quebec electricity industry (including transmission and distribution of power) was only $9.5 billion in 2006. Selling the power in a competitive price environment could have increased this number by at most $4.5 billion, to $14 billion. This would still have been 3 to 6 times smaller than the percentage of total value added derived from oil and gas extraction in Newfoundland, Alberta and Saskatchewan in that year. Quantitatively, Quebec hydroelectric power generation could never be a match for oil and gas extraction in other parts of Canada.

Furthermore, the additional $4.5 billion of value added in the Quebec electricity industry would not have been a net addition to GDP because the higher prices would have reduced the income available to electricity consumers for spending on other goods and services. Quebec would have realized a net gain from the more efficient allocation of electric power, but that gain would have been a modest fraction of the additional $4.5 billion in hydroelectricity profits – certainly less than 1 per cent of GDP. And besides, that net gain could have been entirely eaten up by the loss of equalization payments triggered by this increase in Hydro-Quebec profits.⁶

Continue reading “A Canadian Problem, Not a Quebec One” →

The myth of a lagging Quebec doesn’t stand up to the facts

There’s a general impression that Quebec is dragging down the Canadian economy and is propped up by taxpayers in English Canada. This impression is based on a number of statistical measures: rate of growth of the Gross Domestic Product, GDP per capita and the unemployment rate. However, an analysis based on real income per capita¹ – an estimate of what the average person can buy with an average income – presents a very different picture, especially when leisure time is also taken into account.

Real income per capita has been growing faster in Quebec

Over the past half century, Quebec’s real income per capita has been growing faster than Ontario’s (chart 1). In 1961 Quebec’s average real income was 80 per cent of Ontario’s; in 2007 it was 92 per cent. The process of convergence toward Ontario’s standard of living has been slow but persistent. There have been ups and downs, of course: for example, Quebec’s average real income grew relatively quickly during construction of the James Bay megaproject in 1976–81; and relatively slowly throughout the 1980s as the economy digested the economic and social excesses of the previous period.

The convergence process was driven by two main factors: changing demographics in the 1960s and 1970s, and a rising employment rate since 1980. First, after 1960, baby boomers entered adult life in large numbers, but had few children. The mathematical consequence of more adults at work and fewer children at home was a sharp increase in real income per capita. Although common to all parts of Canada, this passage from baby boom to baby bust was more pronounced in Quebec. From 1960 to 1980 Quebec, to a larger extent than Ontario, got richer by making fewer babies.

Second, after declining relative to Ontario’s beginning in the mid-1950s, the employment rate of Quebec’s working-age population started to increase in the early 1980s. Quebec’s employment rate was 85 per cent of Ontario’s in 1982 and 96 per cent in 2007 (chart 2). This explains why, as chart 1 shows, Quebec’s real income per capita continued to increase faster than Ontario’s long after the demographic transition from baby boom to baby bust had been completed around 1980. The crucial fact here is that, over the last 25 years, Quebec has improved its relative income performance by putting more people to work.

Those are the two main factors. Quebec’s improved position is not the result of productivity growth: labour productivity (output per hour of work) in Quebec has increased 1 per cent per year since 1981, compared to 1.3 per cent in Ontario. And Quebec’s work force hasn’t been working harder: in 1978, average work time per employee was 1,840 hours per year in both Quebec and Ontario; in 2007, average work time in Quebec was 6 per cent less than in Ontario – 1,666 hours in Quebec compared with 1,780 hours in Ontario.

Three sources of employment growth

The obvious question is: what factors have been responsible for the long-term increase in Quebec’s employment rate, from 55 per cent of the working-age population in 1981 to 61 per cent in 2007? Let me mention the three most important.

First, in previous decades, the participation rate for women had always been lower in Quebec than in Ontario. In 1981, for every 100 men working, there were 64 women working in Quebec and 71 in Ontario – a seven-point differential. Quebec women were slow to enter the labour market, but over the last 25 years they have closed ranks with their Ontario sisters. In 2007, there were 91 women in the workforce for every 100 men in Quebec, against 92 in Ontario. In raw arithmetic, this gap-closing process would account for almost half of the increase in Quebec’s total participation rate.

Second, 50 years ago, Quebec’s population was among the least literate in North America. In 1961, young Quebec males in their twenties had completed 10 years of school on average. The corresponding numbers were 12 for Ontarians, 13 for Americans and 11 for black Americans. Forty years later, in 2001, the median number of years of schooling of young adults aged 25 to 29 was 15 in Quebec and Ontario and 14 or less in other parts of Canada and the United States. Further, young Quebecers now regularly appear at or near the top among North Americans in international assessments of competence in mathematics, language and science, such as the OECD’s Program for International Student Achievement. The educational revolution in Quebec has been impressive. Given the close connection between the level of schooling and the capacity to hold jobs, the swift increase in the employment rate of Quebec’s adult population in the past quarter century is no surprise.

Third, over time Quebec has learned to manage its system of industrial relations peacefully, despite having a much higher rate of unionization than other parts of North America. While union coverage is currently at 40 per cent in Quebec and 28 per cent in Ontario (it’s 13 per cent in the U.S), since the mid-1990s the average number of days lost due to strikes and lockouts as a percentage of the total number of wage earners (whether unionized or not) is no higher in Quebec than in Ontario. This implies that, per union member, work stoppages are less frequent and less intense in Quebec.

It was not always thus. From 1972 to 1983, relative to total employment, Quebec lost twice as many work days as Ontario to strikes and lockouts. In addition, average wages in Quebec increased from 92 per cent of Ontario wages in 1972 to 101 per cent of Ontario wages after 1977, with the social unrest and wage explosion that characterized Quebec’s labour market from 1972 to 1983 contributing to increased unemployment rates. As chart 3 shows, while Quebec’s unemployment rate exceeded Ontario’s by only two points on average from 1966 to 1976, the differential shot up to four points between 1977 and 1990. This increase in relative unemployment occurred despite the boost given to employment by the James Bay construction project, which carried Quebec incomes to exceptional heights in 1976–81.

Quebecers enjoy more free time

The rise in women’s labour force participation, the educational revolution and the onset of more peaceful industrial relations nevertheless left Quebec’s per capita income at only 92 per cent of Ontario’s in 2007. This doesn’t look like a very bright performance. However, it is crucial to observe that, whether by individual or social choice, workers “buy” more free time in Quebec than in any other Canadian province or U.S. state. Quebecers work fewer hours per week, fewer weeks per year and fewer years in their careers. As noted above, in 2007 employees worked 1,666 hours on average in Quebec, as compared with 1,780 hours in Ontario – in the United States, it’s 1,794 hours. In the 55-to-64 age group, only 50 per cent of Quebecers were still at work, compared to 60 per cent of Ontarians and 62 per cent of U.S. workers.

Of course, to work fewer hours and enjoy more leisure, Quebecers must give up some income. In turn, this forgone income must reflect the value Quebec workers put on free time. Hence, a proper notion of total welfare has to incorporate the value of the increased leisure time together with cash income into an encompassing estimate of the “true” standard of living. This means that Quebec’s true standard of living relative to Ontario’s exceeds the 92 per cent mentioned above, which only captures the interprovincial ratio of cash incomes. If workers were active as many hours per year in Quebec as in Ontario, and if the percentage of 55-to-64-year-olds working in Quebec were 96 per cent of what it is in Ontario (instead of 83 per cent), then per capita income in Quebec and Ontario would be equal. Admittedly, this calculation may overstate Quebec’s relative standard of living somewhat: some of the additional free time may be forced on unwilling workers by labour market conditions and various institutions. But any reasonable adjustment to take account of additional leisure time leaves us with one basic conclusion: the average standard of living is now about the same in Quebec as in Ontario.

This conclusion will appear startling to many, and will be challenged. Let me anticipate a few objections.

First, it is often pointed out that the total volume of goods and services produced by the economy (“real GDP”) has increased more slowly in Quebec than in Ontario. Over the 20-year period 1987–2007, for instance, the annual growth rate of real GDP (as measured by Statistics Canada) has averaged 2.1 per cent in Quebec and 2.7 per cent in Ontario. From this observation it is usually inferred that Quebec has been a systematic underperformer. This is entirely misleading, because it does not take population growth into account. What is relevant here is the volume of goods and services produced by the average individual – which is the basis of his or her income and welfare – and not the total volume produced by all individuals, which also depends on the population. In other words, the relevant indicator of performance is not total real GDP, but real GDP per capita, and here Quebec is the clear winner. Between 1987 and 2007 the annual growth rate of real GDP per capita averaged 1.5 per cent in Quebec and 1.2 per cent in Ontario.

The same applies to employment comparisons. Over the last two decades, total annual employment growth has averaged 1.2 per cent in Quebec and 1.5 per cent in Ontario. But annual employment growth per capita has averaged 0.6 per cent in Quebec and 0.1 per cent in Ontario.

It’s interesting that, with respect to population growth in relation to growth rate of real GDP per capita, Quebec seems to go against the international trend: recent research by Professors Paul Beaudry and David Green of the University of British Columbia shows that, in advanced countries, faster growth of real GDP per capita tends to be associated with faster population growth.

A second objection to my conclusion would be that, according to straight population and national accounts data, per capita GDP in 2007 was $38,700 in Quebec and $45,500 in Ontario, which gives a Quebec/Ontario ratio of 85 per cent. Thus, my earlier statement that Quebec’s real income per capita was 92 per cent of Ontario’s in 2007 appears greatly exaggerated.

I remind readers of my stipulation at the outset, that I am comparing real income per capita. Goods and services are on average about 9 per cent cheaper in Quebec than in Ontario. This means that the $38,700 GDP per capita in Quebec buys the same volume of goods and services as $42,100 in Ontario. Thus, Quebec’s average purchasing power amounts to 92 per cent of Ontario’s GDP per capita of $45,500.

A third challenge to my conclusion emphasizes the fact that Quebec suffers from a relatively high unemployment rate. In 2007, its unemployment rate was 7.2 per cent, against 6.4 per cent in Ontario, 4.6 per cent in the United States, 4.2 per cent in British Columbia and 3.5 per cent in Alberta. This is true, but the less favourable unemployment situation in Quebec has already been incorporated in the calculations reported above for the province’s relative standard of living.

Clearly, Quebec’s unemployment rate is still too high, and the fight against structural unemployment is not over. However, it is important to remember that the situation has improved markedly relative to Ontario in the last two decades. As chart 3 indicates, between 1977 and 1990 Quebec’s unemployment rate was 3 to 5 points above Ontario’s. The differential is now approaching 1 point. The structural factors noted above – increased schooling, the increased participation of women, more peaceful industrial relations – have had an effect.

Of course, Ontario has recently been hit by severe external shocks, including high prices for imported commodities, a weak U.S. economy and a high Canadian dollar. These have kept Ontario’s unemployment higher than would otherwise be the case. But this circumstance has not seriously distorted comparisons of unemployment between Quebec and Ontario, because Quebec’s unemployment has been similarly affected by the same external shocks. In fact, between 2002 and 2007, the decline in employment in manufacturing – the sector most affected – was actually larger in Quebec (16 per cent) than in Ontario (13 per cent). So, on balance, the impact of the shocks on the unemployment rate differential between the two provinces has not been significant. In the end, there is no escaping the conclusion that Quebec’s declining relative unemployment rate reflects a longer-term trend.

A fourth objection is that Quebec’s real income per capita is one of the lowest among U.S. states and Canadian provinces. This is true, but it is also the source of some confusion. Table 1 shows how each of the 10 Canadian provinces ranked in terms of real income per capita among the 60 provinces and states in 2006. The provinces can be separated into two groups. The first is made up of the three provinces whose economies are floating on oil and gas: Alberta, Newfoundland and Saskatchewan. They rank in the middle of the pack, in 31st place or better. All other provinces are found near the bottom, ranked 51st or worse. Hence, the message we get from table 1 is: if you happen to sit on large reserves of oil and gas, you’re okay; if you don’t, you’ll be found in the bottom ranks of North America for real income per capita. Quebec belongs to the latter, less fortunate group. The fact that its economic performance is mediocre by North American standards does not constitute evidence that there is a specific Quebec problem. Rather, the table indicates there is a Canadian problem for all provinces, including Quebec, that are not significant oil and gas exporters.

Bridge the gap with the United States

This last observation is crucial because it shows what our macroeconomic objective must be, not only for Quebec but for the entire country: close the gap with the U.S. average level of income. There is no chance that this can be done by putting a much higher percentage of our 15-and-over population to work, as we have done in the past quarter century. With the aging of baby boomers, it is inevitable that the employment rate of our total adult population will decline – this applies particularly to Quebec, where the demographic transition will be the most challenging. If the growth rate of real income per capita is to accelerate in Quebec and in Canada, and if higher employment rates cannot do the trick, each of those at work will have to produce more per hour. In other words, the solution will have to come from productivity growth.

While Quebec is now, without question, on a par with Ontario in standard of living, there is a problem. It is not that Quebec lags behind Ontario, but that both provinces (and many others) lag behind the United States economically. And if the gap with U.S. per capita income is to be bridged, it is going to be through faster productivity growth everywhere in Canada. My firm conviction is that Canada can do this without giving up on combating poverty and income inequality. In these areas, Canada is already doing better than the United States – with Quebec definitely in the lead – and could do even more. I will write about this in a future issue of Inroads.

Continue reading “Quebec’s Surprising Economic Performance” →