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Why Canadians can’t stop borrowing: Stagnating incomes

Running up debts becomes a big problem for those who suddenly see their incomes take a hit.

Kevin Van Paassen/The Globe and Mail

Canadians never look more financially irresponsible than they do in our most widely followed measure of national indebtedness.

Through successive years of slow economic growth, the debt-to-disposable-income ratio has been stuck at or near record levels. At end of the third quarter of 2016, every dollar of take-home pay was matched by $1.67 in debt.

We Canadians just won't live within our means. What is up with us?

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Partly, it's that interest rates are so low. Whether you're getting a mortgage, financing a car purchase or using a line of credit, rates today are very likely as cheap as we'll see in our lifetimes. But there's more to it than that. Incomes – stagnating incomes, that is – are also a big factor.

After-inflation earnings growth has been on a generally declining track since the last recession, but the downward momentum has picked up in the past couple of years.

According to the latest Statistics Canada numbers, 2016 was shaping up as a year where inflation-adjusted earnings for salaried workers showed zero growth and were down 0.4 per cent for hourly workers.

"If wage growth slows, so does your purchasing power and so does the economy," said Armine Yalnizyan, senior economist at the Canadian Centre for Policy Alternatives. This is our strange economic reality today – people are taking on debt to make up for stagnant or declining purchasing power, but it's not enough to jolt the economy. Growth is still on the weak side, December's strong job creation numbers notwithstanding.

Ms. Yalnizyan was one of the economists who contributed to a must-read collection of 75 economic charts that Maclean's compiled as a guide on what to watch in 2017. Her input was a chart showing the growth rate for the average hourly inflation-adjusted earnings of salaried and hourly employees. The chart is headlined, "Canada just can't shake off the slowth," a term that means slow growth.

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Unfortunately, the data in the chart may understate the problem of income stagnation. Ms. Yalnizyan said the average data are pulled higher by workers with incomes at the highest levels, and by the skew in our working population toward older workers at the peak of their career earning power.

Up until a couple of years ago, the longer-term average numbers were further supported by strong earnings growth in resource-based provinces, notably Alberta but also Saskatchewan and Newfoundland and Labrador. "If you take apart the numbers by province, you will see very clearly that [rising earnings] are a resource boom-driven phenomenon," Ms. Yalnizyan said.

There is some good news in the income numbers – Ms. Yalnizyan said young people between the ages of 15 and 24 have benefited from solid wage growth in recent years as a result of higher minimum wages in some provinces. But the bigger story is that both wages and wage growth in Canada are not delivering the lifestyle to which we aspire. Borrowing is how we make up the difference.

We should probably spend a little less to keep our borrowing more in line with our incomes. But growth in household debt in the third quarter of last year was actually quite modest at 1.3 per cent. The debt-to-income ratio moved higher – to 166.9 per cent from 166.4 per cent in the second quarter – because disposable incomes rose a puny 1 per cent.

Higher incomes would help contain debt growth, but it's hard to be optimistic about pay hikes in today's slow-growth world. A report from CIBC World Markets late last year found that the quality of employment is falling, as judged by the proportion of part-time versus full-time jobs, self-employment versus paid employment and the compensation of full-time jobs.

Even before these changes, Canada was a low-wage country. Ms. Yalnizyan cited 2012 numbers from the Organization for Economic Co-operation and Development that showing that, among OECD member countries, Canada has had the fifth-highest proportion of low-wage workers (earning less than two-thirds the median income).

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There are two ways for the cycle of debt rising faster than incomes to end. Either an economic shock terrorizes people into borrowing less, or we get to a point where incomes rise faster than debt levels. The federal Liberals talk a lot about helping the middle class. We'll know they've accomplished something if wage increases once again give us an advantage over inflation.

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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998.Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More

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