Canadians will continue to collect more and larger paycheques after
    recession endsTORONTO, June 9 /CNW/ - CIBC (CM: TSX; NYSE) - Canadians' real disposable
income grew twice as fast as that of Americans' in the last four years - a
trend that will continue in the post-recession economy, finds a new report
from CIBC World Markets Inc.
    Since 2005, per capita real disposable income in Canada has risen by
C$2,600, whereas in the U.S. it has risen by just over US$1,300. This is a
complete reversal of the trend seen in the 1990s when Canadian income
stagnated compared to surging U.S. earnings.
    "So quick was the revival of Canadian income that in a short four year
span, per capita real income in Canada was able to wipe out no less than 15
years of income underperformance vs. the U.S.," says Benjamin Tal, senior
economist and author of the report. "In fact, when measured in common
currency, real per capita disposable income in Canada relative to the U.S. is
now back to the 1990s level."
    The report notes that personal income is derived from four categories:
labour income; transfers from government; interest and dividends; and other.
The key driver behind Canada's outperformance was in labour income which saw
an 11 per cent increase (inflation adjusted per capita) over the past four
years - far outstripping the two per cent increase south of the border. In
fact, the outperformance of labour income in Canada has accounted for the
entire widening income gap between Canada and the U.S. since 2005.
    Labour income growth is determined by three factors: wage increases; job
creation; and the sectoral distribution of employment. "The reality is Canada
has outperformed the U.S. in all categories," notes Mr. Tal.
    Since 2005, real wages in Canada have risen by 10 per cent -more than
double the pace seen in the U.S. The growth in wages accounts for one quarter
of the increase in the labour income gap between the two countries. In the
last four years overall employment in Canada climbed five and a half per cent
while employment remained flat in the U.S. Stronger Canadian job creation has
accounted for about 45 per cent of the increase in the Canada-U.S. labour
income gap since 2005.
    Mr. Tal's research also found that the quality of new jobs was much
higher in Canada than the U.S. The number of jobs created in high-paying
industries was up by more than four and a half per cent in Canada but down
four per cent in the U.S. As a result, the ratio of high-paying to low-paying
jobs in the U.S. has fallen by almost 10 percentage points over the past four
years while in Canada it remained relatively stable. This difference in the
sectoral distribution of employment growth accounted for close to 18 per cent
of the increase in the labour income gap between the two countries since 2005.
    The report notes that the Canadian performance is even more impressive
given that U.S. households enjoyed a significant tax cut and increase in
transfer payments from government over the last four years. The net result is
that despite a per capita real disposable income increase of just over
US$1,300 since 2005, the per capita real transfer to governments in the U.S.
was virtually unchanged. In Canada, our per capita real disposable income
increased by C$2,600 during the same period even after factoring in an
increase in tax contributions of close to C$600.
    Canada also outperformed the U.S. in per capita real disposable income
over the past four years in the "other" category (which includes items such as
self-employment income), while the performance of income from investment was
roughly the same in both countries.
    "Even putting aside the strengthening of the Canadian dollar, the
Canada-U.S. per capita disposable income gap has widened by six percentage
points since 2005," says Mr. Tal. "The chief factor here was the much stronger
increases in Canadian labour income which in turn, were boosted by a cocktail
of faster job creation, higher wage gains and a healthier sectoral
distribution of new jobs in Canada.
    "While personal disposable income in Canada fell by more than two per
cent (annualized) during the first quarter of the year, the reality is that
over the past four years, every Canadian saw his/her net income rising twice
as fast as in the U.S. Not only does this outperformance suggest lower
vulnerability to the current recession when compared to the situation south of
the border, but this outperformance is, in fact, sustainable."
    Mr. Tal notes that there is little doubt that the reversal of fortune in
Canadian personal income was largely linked to the recent surge in commodity
prices in general, and energy prices in particular. "The broadly based gains
in labour income over the past four years (job creation, wage gains and
favourable sectoral distribution) suggest that the economic multiplier of
higher commodity prices on the labour markets, and thus personal income in
Canada, is powerful.
    "Our view that the recent retraction in commodity prices is just a
correction within a context of rising commodity markets suggests that in the
post-recession economy, Canadians will continue to collect more and larger
paycheques than their neighbours to the south."
    The complete CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/cwcda-090609.pdf

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