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“Where’s the Beef?”
Living Standards and Inflation
Victories in Canada 1981-2007
Lars Osberg
Economics Department
Dalhousie University
Twenty Years of Monetary Policy in
Canada: A Symposium on the
Edmonton Manifesto
Edmonton, February 4, 2008
Context

Intellectual and Institutional


Benign Global Economic Environment for
Canadian inflation targets




Inflation Targeting – Increased International
popularity since 1991
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


1981 – Regime shift to disinflation dominance


"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”
“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 1980-2005
CANSIM Table 202-0411 - Median total income, by economic family type, 2005 constant dollars, annual
Median Income by Household type
($2005): 1980-2005
80000
70000
60000
50000
40000
30000
20000
All family units
Economic families, two persons or more
10000
Non-elderly families
Female lone-parent families
0
Unattached individuals
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
1980 – 2007: a ‘new normal’ in Canada
CANSIM1 I603501 1961-2000; URQUHART 1914-1960
Real (2000 $) Hourly Wage in Canada
1914-2000
25
15
10
5
0
19
14
19
17
19
20
19
23
19
26
19
29
19
32
19
35
19
38
19
41
19
44
19
47
19
50
19
53
19
56
19
59
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
hourly wage (2000 $)
20
year
Real Average Hourly Wages
1991 – 2006
v1806037 & v1807573 Canada; Including overtime; Industrial aggregate excluding unclassified
Real Average Hourly Wages - Canada 1991-2006
30.00
25.00
2006 $ Cdn
20.00
15.00
hourly paid
10.00
salaried
5.00
0.00
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
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
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
salaried
“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.”


“Index of Economic Well-Being”



Blanchflower NBER WP 13505 Oct. 2007
Osberg & Sharpe RIW (2005,2002)
Decline in Economic Security drives downward
trend in 1990s in Canada
Both reinforce message of $ income trends
Average Household Income
CANSIM v1546478 Canada; All family units; After-tax income; Average income (2005
Dollars); Total of quintiles

Average After-Tax Household Income
1989 – 2005 $ Cdn

1989 - $47,700
1993 - $43,800 (MIN)
2005 - $51,900
48000

AVERAGE = $47,065
46000
Series1
54000

52000

2005 Cdn $
50000

Net (undiscounted)
average loss over period
44000
42000

40000
38000
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
1989 average $ income not
reached again until 2000
Real Income in Canada by Quintile
1980 - 2005
CANSIM v21188957-v21188962 ; After-tax income; Adjusted average (2005 Dollars)
80000
70000
60000
Average
50000
2005 $
bottom 20%
quintile 2
40000
quintile 3
quintile 4
30000
top 20%
20000
10000
0
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
Income Gains – only at the top!
bottom
20%

1989
13400
27800
42000
58500
2005
12200
27600
42800
62800 114300
96800
1989 – 2005: comparison endpoints ignores:





quintile 2
top
quintile 3 quintile 4 20%
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 !!
Changes in real income
- largest in top percentiles
Percentage Change in Real Income
1982 to 2004
90.00%
80.00%
70.00%
Individual % change
60.00%
Family % change
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%
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% 95 to top 1
to
99%
%
95%
Mono-causality ?
- Probably more to it than that!
1.400

Real GDP per
Capita 1989-2006


Canada + 30.9%
Average CPI
inflation

Real GDP per capita
1989 -2006
1.200
1.000
0.800
Canada
0.600
Canada 1.9%

1992-2006
0.400
0.200
0.000
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
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.or
g/dataonline/
Real GDP per capita
1989-2006
1.800
1.600
1.400
1.200
1.000
0.800
0.600
Canada
Turkey
0.400
0.200
0.000
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
“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
80000
70000
60000
2005 $ Cdn
50000
average
bottom 20%
Quintile 2
40000
Quintile 3
Quintile 4
30000
Top 20%
20000
10000
0
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Trends in Average Income by Quintile
1989 – 2005 CANSIM V1546479 – V1546483
After Tax Household Income by Quintile
Canada 1989 - 2005
140000
120000
100000
average all
80000
bottom 20%
quintile 2
quintile 3
60000
quintile 4
top 20%
40000
20000
0
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005