“Where’s the Beef?”Living Standards and Inflation Victories in Canada 1981-2007

Lars OsbergEconomics DepartmentDalhousie UniversityTwenty Years of Monetary Policy in

Canada: A Symposium on the Edmonton Manifesto

Edmonton, February 4, 2008

Context Intellectual and Institutional

Inflation Targeting – Increased International popularity since 1991

Benign Global Economic Environment for Canadian inflation targets Low inflation – global & US Strong US growth over most of period Recently

Oil & Commodity prices up strongly Worries about US recession

Consistent Victories in Inflation Targets Expectations of “low & stable” inflation embedded

Assessing Canada’s Monetary Policy Experiment – What Criteria matter?

“Monetary policy shares the same bottom line as other broad economic policies – to contribute to raising our living standards”

(Crowe:1988)

Is there evidence of appreciable improvement in the living standards of most Canadians, subsequent to monetary policy regime shift?

1988 – “The year of the second shoe”

Hard to imagine 1988 Hansen lecture without prior disinflation 1982-84 Annual CPI Inflation

averaged 8.1% 1976-80 11/80 –7/82 – 10%+ June 1981 – 12%

1984 – 1988: average 3.81%

1981 to present “The goal of monetary policy is to contribute to

solid economic performance and rising living standards for Canadians by keeping inflation low, stable, and predictable.” http://www.bank-banque-canada.ca/en/about/do.html

Have living standards increased for most Canadians? 1935-1979/80 – Bank of Canada Act (1934)

Balancing of objectives "to regulate credit and currency in the best interest of the

economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment”

1981 – Regime shift to disinflation dominance “whatever it takes” – TBill rate = 20.85% Aug. 1981

1988-2007: "a path that leads towards underlying price stability“

monetary tightening 1989/90 + Associated Recession + Public Debt Crisis

1991+ commitment to explicit inflation targets

1981-2007 OR 1988-2007 OR 1992-2007?? Flat is flat

But we should count the costs of disinflation !!

Little change in real median household income 1980-2005CANSIM Table 202-0411 - Median total income, by economic family type, 2005 constant dollars, annual

Median Income by Household type ($2005): 1980-2005

0

10000

20000

30000

40000

50000

60000

70000

80000

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

All family units

  Economic families, two persons or more

    Non-elderly families

        Female lone-parent families

  Unattached individuals

1980 – 2007: a ‘new normal’ in CanadaCANSIM1 I603501 1961-2000; URQUHART 1914-1960

Real (2000 $) Hourly Wage in Canada1914-2000

0

5

10

15

20

25

year

ho

url

y w

ag

e (

20

00

$)

Real Average Hourly Wages1991 – 2006

v1806037 & v1807573 Canada; Including overtime; Industrial aggregate excluding unclassified

Real Average Hourly Wages - Canada 1991-2006

0.00

5.00

10.00

15.00

20.00

25.00

30.00

2006

$ C

dn

hourly paid

salaried

hourly paid 18.46 18.75 18.74 18.96 18.74 18.96 18.80 18.84 18.84 18.86 18.71 18.67 18.30 18.48 18.48 18.55

salaried 24.65 25.35 25.40 25.87 25.99 26.00 25.85 26.18 26.18 26.09 25.66 25.53 25.34 25.48 25.78 26.08

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

“Well-Being” depends on more than just money income

“Happiness” & Subjective Indicators A large literature 1997-2007

“Unemployment appears to be more costly than inflation in terms of its impact on wellbeing.”

Blanchflower NBER WP 13505 Oct. 2007

“Index of Economic Well-Being” Osberg & Sharpe RIW (2005,2002)

Decline in Economic Security drives downward trend in 1990s in Canada

Both reinforce message of $ income trends

Average Household IncomeCANSIM v1546478 Canada; All family units; After-tax income; Average income (2005 Dollars); Total of quintiles

Average After-Tax Household Income

38000

40000

42000

44000

46000

48000

50000

52000

54000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

2005

Cdn

$

Series1

1989 – 2005 $ Cdn 1989 - $47,700 1993 - $43,800 (MIN) 2005 - $51,900

AVERAGE = $47,065 Net (undiscounted)

average loss over period

1989 average $ income not reached again until 2000

Real Income in Canada by Quintile1980 - 2005

CANSIM v21188957-v21188962 ; After-tax income; Adjusted average (2005 Dollars)

0

10000

20000

30000

40000

50000

60000

70000

80000

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

2005

$

Average

bottom 20%

quintile 2

quintile 3

quintile 4

top 20%

Income Gains – only at the top!

1989 – 2005: comparison endpoints ignores: Intervening years of $ income losses Increased labour supply by households Decreased “social wage” in government services Increased insecurity from UI/EI cuts

All the same – little gain for most Canadians !!

bottom 20% quintile 2 quintile 3 quintile 4

top 20%

1989 13400 27800 42000 58500 96800

2005 12200 27600 42800 62800 114300

Changes in real income- largest in top percentiles

Percentage Change in Real Income 1982 to 2004

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

20%to

25%

25%to

30%

30%to

35%

35%to

40%

40%to

45%

45%to

50%

50%to

55%

55%to

60%

60%to

65%

65%to

70%

70%to

75%

75%to

80%

80%to

85%

85%to

90%

90%to

95%

95 to99%

top 1%

Individual % change

Family % change

Mono-causality ?- Probably more to it than that!

Real GDP per Capita 1989-2006 Canada + 30.9%

Average CPI inflation Canada 1.9%

1992-2006

Real GDP per capita1989 -2006

0.000

0.200

0.400

0.600

0.800

1.000

1.200

1.400

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Canada

Mono-causality ? “price stability - a basic condition of good economic performance” Crowe 1988:24

Real GDP per Capita 1989-2006 Canada + 30.9% Turkey + 53.2%

Average CPI inflation Canada 1.9% Turkey 56.8%

Range 8% - 106% 1992-2006

http://devdata.worldbank.org/dataonline/

Real GDP per capita1989-2006

0.000

0.200

0.400

0.600

0.800

1.000

1.200

1.400

1.600

1.800

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Canada

Turkey

“HOW THE WORLD ACHIEVED CONSENSUS ON MONETARY POLICY” Goodfriend NBER WP 13580 11/07

Contested literature on inflation targeting Inflation performance, variability

“Improved performance” – Mishkin NBER 12876 1/07

“results highly dependent on choice control group”“Window-dressing” – Lin & Ye JME 07

But no reference to improvement in living standards or other criteria with general welfare significance

Just Suppose……Median Living Standards had increased

We could debate % due to: Real Inputs

Substantial Increase Education Levels Baby Boomers aged into most productive years Increased Capital/Labour ratio Technological Change

Market Efficiency Reforms De-regulation Free Trade – FTA & NAFTA & WTO Privatization Low and Stable Inflation performance

But median living standards stagnated !

Time for Truth in Advertising ?

Bank of Canada website still says : “improve living standards” But no evidence thereof – for most

Canadians 20+ years of anti-inflation victories

Transparency – Isn’t it time for the Bank of Canada just to drop the claim?

Density of log hourly wages of employees aged 25-64, 1981-2004

Family-size Adjusted Household Income Canada 1989-2005

0

10000

20000

30000

40000

50000

60000

70000

80000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

2005

$ Cd

n

average

bottom 20%

Quintile 2

Quintile 3

Quintile 4

Top 20%

Trends in Average Income by Quintile1989 – 2005 CANSIM V1546479 – V1546483

After Tax Household Income by QuintileCanada 1989 - 2005

0

20000

40000

60000

80000

100000

120000

140000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

average all

bottom 20%

quintile 2

quintile 3

quintile 4

top 20%