Study: Family earnings instability

Families on the whole faced no more instability in their earnings during the late 1990s than their counterparts did during the late 1980s, despite a number of events in the economy that could have signalled otherwise, according to a new study.

Even so, the study did show that government transfers played a significant role in stabilizing the income of families in the lowest levels of the earnings distribution.

Families in the lowest one-third of the earnings distribution experienced much wider percentage earnings fluctuations over six-year periods than those at the top of the distribution, the study found.

However, government transfers, such as Employment Insurance and Social Assistance, and, to a lesser extent, the progressivity of the tax system eliminated much of these differences.

The study assessed whether the employment income of two-parent families became more volatile between two six-year periods: 1986 to 1991 and 1996 to 2001.

The findings showed that overall this was not the case, despite several events in the economy that should have resulted in increased fluctuations.

First, temporary employment grew during that period, especially among newly hired employees. This implied that a growing fraction of employees had no credible guarantees of employment continuity.

Second, hiring rates fell substantially, making it more difficult for laid-off workers to find new jobs.

Third, real wages of newly hired employees dropped markedly, thereby potentially increasing the earnings losses experienced by workers who found a new job after a layoff.

Nevertheless, family earnings instability changed little between the late 1980s and the late 1990s. Between 1986 and 1991, families with a husband aged 25 to 50 saw their earnings fluctuate on average about 14% from the mean. Ten years later, their counterparts faced roughly the same level of fluctuations.

At least two factors may have tended to offset the upward pressures on family earnings instability.

The proportion of two-parent families with two earners rose between the late 1980s and the late 1990s. This meant that for a growing fraction of these families, the risk of job loss was now spread across two earners, rather than being concentrated on a single earner.

Moreover, permanent quit rates fell substantially between the late 1980s and the late 1990s, thereby inducing an increase in job stability during that period. All else equal, these two factors should have tended to lower family earnings instability.

Families faced no more earnings instability in late 1990s than late 1980s

Families experienced roughly the same degree of earnings instability during the late 1980s and the late 1990s.

For instance, families with a husband aged 30 to 34 saw their employment income fluctuate from its mean by roughly 14%, both during the 1986 to 1991 period and the 1996 to 2001 period.

In both periods, families in the lowest levels of the earnings distribution had much more unstable employment income than their counterparts at the top of the distribution.

However, Canada's transfer system eliminated most of these differences during the 1996 to 2001 period.

Among families with a husband aged 30 to 34, those in the bottom third of the earnings distribution between 1992 and 1995 saw their employment income fluctuate from its mean by 18% during the 1996 to 2001 period. In contrast, their counterparts in the top third of the earnings distribution experienced earnings fluctuations that averaged 12%.

After accounting for the whole set of government transfers, the former group of families saw its income before tax fluctuate by only 12% during the 1996 to 2001 period, compared to 11% for the latter group.

Because of its progressivity, the tax system reduced these differences further. Among families with a husband aged 30 to 34 and located in the bottom third of the earnings distribution, after-tax income ended up fluctuating by 10% on average, the same rate observed for their counterparts at the top of the distribution.

By increasing the income of families in the bottom of the earnings distribution, Canada's transfer system reduced substantially the proportional income losses that these families may have experienced as a result of negative earnings shocks (such as job loss), and thus, increased the economic security of a substantial portion of the Canadian population.

Growing gap between rich and poorer families

While there was little change in the stability of family earnings between the two six-year periods, the gap between families in the lowest levels of the earnings distribution and their counterparts at the top of the distribution widened.

For instance, families in which the husband was aged 35 to 39 and which were located in the top third of the earnings distribution saw their average employment income (adjusted for inflation) rise by 21% between these two periods.

In contrast, average employment income fell 1% among their counterparts in the bottom third of the earnings distribution.

The growing earnings gap between the two groups of families was the result of two factors.

First, between these two periods, earnings of husbands aged 35 to 39 increased 20% among families in the top third of the earnings distribution, but they fell 8% among those at the bottom.

Second, wives' earnings grew at the same rate of 26% in both sets of families but they initially represented a bigger percentage of family earnings among families located at the top (30%) than among those located at the bottom (20%). As a result, they tended to boost earnings growth more among the wealthier families than among the poorer families.

The growing inequality in family earnings, measured over two six-year periods, suggests that the Canadian distribution of family earnings is undergoing changes that are more fundamental than those based simply on annual data.

Definitions, data sources and methods: survey number 4107.

The research paper "The instability of family earnings and family income in Canada, 1986 to 1991 and 1996 to 2001" (11F0019MIE2005265, free) is now available online as part of the Analytical Studies Branch Research Paper Series. An abridged version of this study entitled "Summary of: The instability of family earnings and family income in Canada, 1986 to 1991 and 1996 to 2001" (11F0019MIE2005266, free) is also available. From our home page select Studies, then under Browse periodical and series choose Free and for sale. Under Series select Analytical Studies Branch.

Related studies from the Business and Labour Market Analysis Division can be found at Update on Analytical Studies (11-015-XIE, free) on our Web site.

For further information or to enquire about the concepts, methods or data quality of this release, contact René Morissette (613-951-3608), Business and Labour Market Analysis Division.