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.

Note

¹ Your purchasing power – or “real income” – is an estimate of what you can buy with your money income. For the entire economy, the average money income of the total population is called “GDP per capita.” The average price of what the population buys is provided by the price index of what is termed “final domestic demand.” “Real income per capita” will thus be based on the relationship between GDP per capita and this broad price index. The data for both GDP per capita and the price of final domestic demand are published by Statistics Canada. Where needed, I convert real income per capita into Canadian dollars with identical purchasing power to allow for meaningful comparisons between provinces and countries.