Economy

Income per capita, or gross domestic product (GDP) per capita, is the most frequently used statistic for comparing economic well-being across countries. Income per capita measures the value of things exchanged in the marketplace. While high performance in this category does not guarantee a high quality of life, a country that is not generating enough income is hampered in what it can do on the environmental and social fronts.

The indicator is a per capita measure, because a country’s total income may rise as its population increases, even though there may have been no improvement in the income level of the average citizen. To compare per capita income, the indicator is also adjusted to remove the effects of price changes.

Many economists have pointed out the shortcomings of income per capita as a measure of well-being. For example, income per capita actually rises as crime rises if the country spends more money to fight that rising crime—on a larger police force or improved intelligence technologies. Indeed, among Canada’s 17 peer countries, the U.S. has the second-highest level of income per capita but also the highest rate of poverty, the highest homicide rate, and the lowest life expectancy. Several adjusted-GDP indicators are now being developed to try to account for the social or environmental aspects not captured in GDP calculations.

Canada is being affected by a worldwide downturn. The world financial system crisis can be traced to aggressive sub-prime mortgage lenders in the U.S. and to the lax lending standards of western European banks on their loans in eastern Europe. Of all the developed world’s banking sectors, Canada’s is in the best shape. Its conservative and relatively cautious approach meant that, for the most part, Canadian banks did not get involved in the splurge in investing in mortgage-backed securities in the early to mid-2000s. As a result, no Canadian banks have failed or been forced to seek government help. Still, the dramatic decline in U.S. demand for Canada’s exports, together with falling equity values and commodities prices, contributed to a 3.4 per cent contraction in Canada’s real GDP in the fourth quarter of 2008. Overall, Canada’s real GDP grew by only 0.5 per cent in 2008. Because the population growth rate was higher than the GDP growth rate, income per capita fell.

Not exactly, but Canada’s ranking on income per capita dropped from 5th position among the 17 countries in 2000 to 8th position in 2008. Canada’s income per capita was US$31,639 in 2008—nearly $9,200 below Norway, the top performer.

Canada’s income per capita also trails that of the United States. The Canada–U.S. income gap doubled between 2004 and 2008, to $6,400. Canada is stuck at about 83 per cent of the U.S. level.

Use the drop-down menu to compare the change in Canada's income per capita with that of its peer countries.

The most important determinant of a country’s per capita income, over the longer term, is productivity. This is because there is no limit to productivity growth. There is a limit to how many hours an employee can work, to how low the unemployment rate can fall, to how high the labour force participation rate can rise, and to how large the proportion of working-age people within the total population can be. But innovation and technological change can sustain productivity growth indefinitely. In the equation below, productivity is the only component with no upper limit. Improving productivity in Canada is the only sustainable way to reduce the sizable gap between Canadian and U.S. income per capita that has emerged in recent decades.

Lower labour productivity accounts for the largest component of the income gap between Canada and the United States. To get an idea of the role each component of income per capita (shown in the equation in the section above) played in the 2008 Canada–U.S. income gap, we used the equation to calculate income per capita by keeping four of the components the same and substituting the U.S. data for the final component into the equation. Note that the individual gaps generated using this methodology will not necessarily match the overall Canada–U.S. income gap shown in the first chart.

The results for Canada are described below and shown in the chart for each country.

• If Canada’s level of labour productivity had increased to the U.S. level but the other four factors had stayed the same, Canada’s income per capita would have been $8,000 higher.
• If Canada’s hours worked had increased to the U.S. level but the other four factors had stayed the same, Canada’s income per capita would have been $1,000 higher.
• If Canada’s ratio of employment to its labour force had decreased to the U.S. level but the other four factors had stayed the same, Canada’s income per capita would have been $60 lower.
• If Canada’s labour force participation rate had decreased to the U.S. level but the other four factors had stayed the same, Canada’s income per capita would have been $1,000 lower.
• If Canada’s share of working age people had decreased to the U.S. level but the other four factors had stayed the same, Canada’s income per capita would have been $1,200 lower.

So, in Canada’s case, lower labour productivity and fewer hours worked caused Canada’s income per capita to be lower than that of the United States. What helped to narrow the gap? Canada’s higher ratio of employment to its labour force, higher labour force participation rate, and higher proportion of working age people all helped to push Canada’s income per capita up relative to that of the United States.

In 2007, a Statistics Canada study raised questions about the reliability of the measures commonly used to compare Canadian and U.S. income per capita.¹ It noted shortcomings in the data on coverage, concept, and accuracy of hours of work. Even with adjustments to account for these shortcomings, however, productivity still contributes to a significant portion of the gap in income per capita with the United States. The Conference Board’s longstanding message has not changed: Improving productivity should be a policy priority in Canada—it is the only sustainable way to narrow the Canada–U.S. income gap.

Use the drop-down menu to see the sources of the income gap for different countries.

Yes. While Belgium, Ireland, Netherlands, and Norway had higher labour productivity levels than the U.S. in 2008, only Norway—with its huge oil and gas revenues—was able to convert this into higher income per capita than in the United States.

Of the other three countries with higher productivity, not one had a higher income per capita than that enjoyed in the United States. Why? These countries appear to have traded off income for increased leisure time; they all have a shorter work week than in the United States. Ireland’s GDP per capita would be higher than that of the U.S., for example, except that the average employee in Ireland works 185 hours less per year than an employee in the United States. In Belgium, lower hours worked and a much lower labour force participation rate explain the gap. 

Both Canada and Norway benefited in 2007 and 2008 from rising world energy prices. But the oil and gas sector accounts for a much larger proportion of the economy in Norway. There are also some differences in the relative mix of oil and gas produced in the two countries, with Canada producing relatively more natural gas and more heavy crude oil, which is worth less than light oil.

In 2007, the huge demand for oil by China and other developing countries seemed to suggest that commodities were a sure ticket to prosperity. Yet the Conference Board sounded a cautionary note in a comprehensive 2007 report on the future competitiveness of Canada’s resources industries—while Canada’s resource sectors were enjoying boom times, they had to prepare for an eventual slowdown.

This was wise advice. During the first part of 2008, Western economies were already seeing sluggish growth. Oil prices plummeted from a record high of nearly US$150 per barrel in summer 2008 to just over US$30 in December. With the price of oil now lower than production costs, new exploration projects are being cancelled. This is particularly true in Canada, where the high price tag of Alberta oil sands development has put these megaprojects on hold. Being a resource-dependent country no longer seems to be such a blessing.

Both countries have used some of their oil revenues to save for the inevitable rainy day. In Norway, concerns about the longer-term sustainability of North Sea oil and gas production (some analysts say this production has already reached or passed its peak) led the Norwegian government to establish the State Petroleum Fund—now called the Government Pension Fund—in 1990. A portion of annual oil and gas revenues flows into the fund every year.

Canada, in Alberta, has a similar fund—the Alberta Heritage Savings Trust Fund. The fund was established in 1976 to save up oil profits for the benefit of future generations.

Both funds have been hard hit by the current recession. Norway regrettably bought into firms like Lehman Brothers and saw its fund lose over one-fifth of its value, falling to about US$300 billion. Alberta Heritage Fund’s fair value stood at $14.5 billion on December 31, 2008, a loss of 15 per cent over the year.

Despite their current shared woes, the two funds have been managed very differently. Norway has consistently put aside part of its resource surplus into the fund, with the result that the fund is currently the second-largest sovereign wealth fund. In contrast, Alberta has consistently shaved its fund by sometimes stopping contributions altogether, not topping up the fund for inflation, raiding the account to fund government spending, or, as in 2006, mailing every Albertan a one-time $400 cheque.

Learn about the challenges facing Canadian resource industries:

Mission Possible: A Canadian Resources Strategy for the Boom and Beyond, Ottawa: The Conference Board of Canada, 2007.

Canada’s relative position among its peer group of countries has slipped. In the 1970s, Canada’s GDP per capita was $17,812, the fourth highest of its peer countries, earning a “B” grade. This grade was maintained in the following decade but dropped to a “C” average in the 1990s and 2000s.

Many countries saw their letter grades slip in the 1990s and 2000s. This does not mean that income per capita was falling, but it does indicate that the top three are setting the bar higher every year, thereby further widening the income gap with Canada. In other words, the top countries are pulling farther ahead of the pack.

Canada will find it increasingly difficult to narrow the gap. Countries with lower income levels need greater and sustained income growth to try to match or exceed superior economies.

Until recently, Ireland was the success story here. While Ireland currently ranks last on overall economic performance, one should not lose sight of the fact that Ireland transformed itself from one of the poorest countries in western Europe to one of the richest. After its chronic showing as a “D” performer in the 1970s, 1980s, and 1990s, Ireland jumped up to a “B” grade, placing it among the top three most prosperous countries. In the 1970s, Canada’s income per capita was almost double that of Ireland; by 2007, Ireland's income per capita exceeded Canada's by US$5,000, although the gap slipped to US$3,700 in 2008.

What ignited Ireland’s economy? A number of parallel developments played significant roles. These include a more prudent fiscal policy, increased European Union structural funding, the development of the single European market, lower labour costs, and deep cuts to corporate tax rates. The result was a substantial increase in foreign direct investment into the country. While it is difficult to pinpoint a single catalyst for Ireland’s economic success in the 1990s, Ireland’s FDI-friendly environment certainly provided a strong foundation for growth.

To understand Ireland’s transformation:

“When Irish Eyes Are Smiling” in How Canada Performs 2007, Ottawa: The Conference Board of Canada, 2007, p. 36.

¹ Jean-Pierre Maynard, The Comparative Level of GDP Per Capita in Canada and the United States: A Decomposition into Labour Productivity and Work Intensity Differences, (Ottawa: Statistics Canada, 2007).

See discussions on other indicators
Income Per Capita	Unemployment Rate
GDP Growth	Employment Growth
Labour Productivity Growth	Inward FDI Performance Index
Inflation	Outward FDI Performance Index