Report

Canada – Age rather than gender becoming the new income divide finds the Conference Board

Canadians have become accustomed to tales of woe about the plight of young adults: rising tuition fees and crippling student debts; university graduates without jobs or unable to find anything more challenging than serving coffee; even those with good jobs and incomes stuck in their parents’ basements because of the high cost of housing. These images have prompted many to ask a troubling question: Will today’s young Canadians be the first generation in our country’s history to find themselves worse off than their parents?

Three decades of progress in reducing income inequality between men and women has been accompanied by a growing earnings gap between younger and older workers that could threaten future economic growth and social stability, according to new research from The Conference Board of Canada.

The report, The Bucks Stop Here: Trends in Income Inequality between Generations, finds that younger workers are making less money relative to their elders: as men and women, as individuals and couples, and both before and after tax.

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Highlights

  • The income gap between older and younger workers has jumped over the past three decades: for women and men, for individuals and couples, and before and after tax.
  • The average disposable income of Canadians between the ages of 50 and 54 is now 64 per cent higher than that of 25-to-29 year olds, up from 47 per cent in the mid-1980s.
  • This trend in inequality, if it continues, could both limit future economic growth and trigger growing conflict between older haves and younger have-nots.

“Age rather than gender is becoming the new divide in our society,” said David Stewart-Patterson, Conference Board Vice President and a co-author of the report. “The Canadian generation at the top of the income heap today fought long and hard for principles like equal pay for work of equal value, but their children now face lower wages and reduced pension benefits even for the same work at the same employer.”

It’s normal for older workers to make more money than those with less experience. But in the mid-1980s, the average after-tax income of Canadians between the ages of 50 and 54 was 47 per cent higher than that of 25-to-29 year olds. In recent years, that gap has jumped to 64 per cent.

Chosen excerpts by Job Market Monitor.

The gap in income between the young and the old has grown. The rise in average incomes does suggest that younger workers still have opportunities to advance. It also appears that the taxation system has slightly tempered the intergenerational income gap, and that the growth in the gap has levelled off. This may be linked to the labour force participation rate of females, which is still growing but has slowed in the 2000s.

Men and women alike enjoy their highest-earning years between the ages of 50 and 54, and their earnings from employment have steadily been rising faster than those of younger workers. Women in this cohort have seen the strongest gains, with an increase in average employment income of more than 50 per cent in real terms between 1984 and 2010— almost three times faster than men of the same age. Women between the ages of 25 and 29 have seen relatively weak income growth over that period, an increase of only 15 per cent after adjusting for inflation. The earnings gap between older and younger men also has grown, with men between 50 and 54 recording real gains of 18 per cent, while the incomes of the 25-to-29 year old cohort grew by only 6 per cent. The gap in employment income between the 50 to 54 and 25 to 29 cohorts has, therefore, remained consistently higher for men than for women. For men, the gap grew from 53 to 71 per cent between 1984 and 2010. For women, it leaped from just 9 to 43 per cent.

Looking at averages, however, masks some growing disparities. For example, any given couple today—with the potential exception of same- sex male couples—is more likely than a generation ago to have two incomes between them rather than one. As a result, the income of an average young couple has grown more quickly than it has for the average young individual. This also means that a young couple with only a single earner now faces an even greater challenge than in the past. In addition, men in most cohorts have made smaller gains than women in employment income, suggesting that the average increase in employment income across cohorts is primarily due to the increasing presence of women in the workforce, as well as the decreasing wage gap between women and men.

The growth in the income gap between younger and older cohorts may reflect the growing gap in incomes between the rich and the poor in general. If knowledge and experience are being rewarded more than in the past, a natural outcome is growth in the incomes of older and more experienced workers relative to younger workers, but with the latter being able to expect a more rapid increase in income levels than in the past.

 Annual income is just one factor in the accumulation of wealth.

Savings rates and investment returns are other key factors, as are homeownership and the volatility of house prices. With interest rates at historic lows, high homeownership costs, and a growing reliance on defined contribution pension plans or personal savings in lieu of defined benefit pension plans, it is not clear that younger workers will be in a healthy financial position at retirement, even if their incomes do increase rapidly over time. And if they are stretching out the earlier periods of their adult lives by delaying entry into the workforce and having children, it also implies that they should be expecting to work longer and retire at an older age.

This has both economic and social consequences. In economic terms, the aging of Canada’s population means that the size of the labour force will be shrinking as a share of the total and that relatively fewer Canadians will be earning income. To maintain a healthy pace of economic growth, each working Canadian must therefore be able to create more value and earn higher real income than in the past. Yet, the evidence indicates that younger Canadians today are falling behind— their incomes relative to those of older workers are lower now than 30 years ago. If the future incomes of today’s younger workers fail to accelerate, economic growth will be constrained.

A growing scarcity of labour should add upward pressure on wages, but in the meantime, a younger generation that feels left behind could lead to new social tensions. The Canadian generation at the top of the income heap today fought long and hard for principles like equal pay for work of equal value, yet some major employers now offer lower wages and reduced pension benefits for new hires, even for the same work. Employers persistently complain about shortages of skilled labour, yet many highly educated young people seem stuck in low-skill and precarious jobs.

If today’s younger workers continue to see their earnings lag as their experience grows, social stability as well as economic growth could be severely challenged. This suggests that policy-makers need to look beyond investing in education and creating entry-level jobs. The critical issue that emerges is how to ensure that younger workers are able to put their knowledge and skills to use in ways that will drive their incomes up faster than we have seen over the past three decades.

Read the whole story at  Age Rather than Gender Becoming the New Income Divide.

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