Poverty and Recessions: Canada ‘s Vulnerable in Tough Times

1. Poverty and Recessions: Canada‘s Vulnerable in Tough Times Lars Osberg Economics Department Dalhousie University June 23, 2009 Presentation to: Council of the Federation symposium St. John´s, Newfoundland, June 23

2. 2007 – lowest poverty rate in 30 years Statistics Canada no. 75-202-X Income in Canada 2007

3. Poverty and unemployment - rise and fall with the business cycle

4. But there has been a long term big change – Poverty is deeper now

5. So what’s happening to unemployment?

7. IMF “Advanced economies are suffering their deepest recession since World War II.”OECD Economic Outlook March 2009 http://www.oecd.org/dataoecd/18/1/42443150.pdf

8. So what sort of safety net is there ?

9. UI/EI Replacement Rate – 38 years of decline The average of the gross unemployment benefit replacement rates for two earnings levels, three family situations Source: OECD, Tax-Benefit Models. http://www.oecd.org/document/3/0,3343,en_2649_34637_39617987_1_1_1_1,00.html ; The Canadian Labour Force Participation Rate Revisited: Cohort and Wealth Effects Take Hold Steven James, Tim Sargent, Russell Barnett and Claude Lavoie Working Paper 2007‐01, Finance Canada, Page 11

10. EI Replacement Rate: Relatively low by OECD standards

11. The Big Problem – EI is much harder to get, especially since 1996

12. Social Assistance – low & falling ATIONAL COUNCIL OF WELFARE: WELFARE INCOMES 2005

13. Alberta Welfare Income: Couple + 2 Kids - 2005 $ - 30% real cut by provincial SA1986-2005

14. Poverty in perspective • How much of market income would it take to completely eliminate the poverty gap ? • Canada – 1.7% • Nova Scotia – 1.7% • V25746680, v25746752, v25746914; Low income cut-offs after tax, 1992 base; Aggregate low income gap as a percentage of market income (Percent); All family units • For people who do not have much, it does not take much to make a big difference in their lives. • Canada’s total poverty gap - approximately equal to foregone revenue of 2% cut in HST/GST

15. “Low Income/Poverty Line” - How should we measure it? • Methodologies in use in Canada 1970 – 2008 Note: Because real median incomes flat 1980 - 2006, all effectively updated for inflation only • LICO - % income spent on necessities • LIM – 50% median • Market Basket Method • HRDC or Fraser Institute • Subjective (Leyden) • “Barely adequate for day-to-day living” • “Make ends meet”

16. Appendix G Page 81 Low Income in Canada: 2000-2006 Using the Market Basket Measure HRSDC. October 2008; Table 1, page 12 The Evolution of Poverty Measurement - with special reference to Canada Osberg (2007) Poverty Line for 2 adult 2 child family (boy 13, girl 9) $2006 Market Basket Method LICO IAT rural = 21,860 100-499K = 28,200 500K+ = 30,000 LIM after tax = 29,600

17. Income Poverty Line in Canada • Broad consensus on approximate level for urban areas for some family types • BUT “Market Basket” Methodology shows importance of • Child Care Expenses • Transportation Cost in rural areas – bus service NOT available • Is Annual Income Inadequacy a good guide for Poverty Policy?

18. Sen: Commodities are needed for capabilities, which enable valued functioningsPoverty = deprivation of capabilities • Relative income can determine absolute capability • e.g. When everyone else has a car, how to get groceries? • Capabilities <= $ income + “social wage” + context • Problem: “capabilities” = opportunity set, ≠ observed choices • Measurement example: % Canadians without car OR bus stop within 1 KM • Multidimensional Poverty indices • Measure achieved functionings • Can look within households • What is critical value of specific item deprivation? • How to aggregate over single / multiple deprivations? • Correlation of attributes is crucial • Little information added if highly correlated with income, but “too low” correlation implies separable issues involved • Measurement error biases towards chance correlation

19. Social Exclusion – ‘prevented from participation in normal activities of society’ • Example of transportation • Income poverty – do you have enough cash to buy bus fare ? • Capabilities approach – might ask: is there a bus route? – but capability is fundamentally an individual attribute • Social Exclusion – accessibility planning seen as an issue of community design • Bus to where? How often? Is it wheelchair accessible? Where are services located? • Determines feasibility of employment + access to social life & public services – many feedback effects of isolation • Multi-dimensional, mixed indicators, threshold & feedback effects, long term deprivation crucial • Social Exclusion – a relationship of society & the excluded • Measurement Implication – both personal attributes & social context of individuals are crucial to social exclusion & poverty

20. “Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services”UN Universal Declaration of Human Rights (1948) Article 25 • Human rights • Specified by Constitutions & International Covenants • Clear legal origin, specificity & procedural legitimacy in democratic institutions • Indivisible & interdependent • E.g. Right to privacy is empty without right to housing • Imposes obligations on state parties • Typically seen as either/or condition • Head-count measure of deprivation ?

21. Caution:Excess Complexification & its costs !

22. Main Points • Long term trend increase in Average Poverty Gap in Canada • Poverty Rate moves with Unemployment Rate – rapid rise 2009+ • Canada’s social safety net cut substantially in mid 1990s – not fixed • Implications – More Poor People and Deeper Poverty in 2009-11 • As recession grinds on, faster, deeper income losses likely – but less social support is now in place for income replacement than in 1990s • Work Incentives & Retraining – increasingly irrelevant as jobs disappear • Longer Term Trends • Social Exclusion, Capabilities & Human Rights discourse will widen policy dimensions to include context and “social wage”

23. Additional slides if time permits

24. Little change in real median household income in Canada between 1977-2007CANSIM Table 202-0411 –Statistics Canada no. 75-202-X Income in Canada 2007

25. Was slow growth in living standards inevitable? NOT ! – Canada has worst record

26. Average Income has risen because top quintile much better off Statistics Canada 75-202-X Income in Canada 2007

27. Time and Poverty SpellsAnnual accounting period – too long & too short • No cash & no credit? – very cold in much less than a week • Immediate Needs - historic focus of social policy – now downgraded • Human Rights perspective implies short term deprivation matters • Stress may trigger events with long term consequences • Long term poverty & inter-generational impacts ? • Long term poor – clearly the most deprived – “culture of deprivation” a real concern • Now the focus of “Human Capital” emphasis & “Social Exclusion” discourse • Individuals flow through sequence of households • Poverty spell entry, exit and recurrence implied by real time changes in both incomes and household composition • Panel data + {assumption: equivalence scale + no transactions costs} can generate individual life histories of equivalent income poverty spells • Costs of volatility & insecurity in health, well-being & human capital not now recognized

28. Most Poverty Spells are shortStatistics Canada 75-202-X Income in Canada 2007

29. But lots of people cycle through Statistics Canada 75-202-X Income in Canada 2007

30. Not much change & fairly narrow range – in 2006 $ [Fraser Institute an outlier – “extreme deprivation” concept] Lars Osberg and Kuan Xu, Dalhousie University, Canada

31. Distribution Sensitive Poverty Indices SST = FGT1 (1+G(g)) SST = (r) (g) (1+G(gi)). Average Poverty Gap ratio often ≠ poverty rate Inequality of poverty gaps is empirically unimportant Axiomatic basis of Indices Transfer sensitivity axiom important BUT others ?? Focus – relative poverty lines cannot qualify Impartiality – group identities of poor irrelevant Continuity – no “threshold effects” – by assumption Equivalence scales LIS scale now common Stochastic Dominance of Deprivation Profiles Restricted dominance is relevant criterion Poverty among the Elderly ? Axioms, Aggregation & Dominance – measurement since Sen (1976)