The Instability of Family Earnings and Family Income in Canada, 1986
to 1991 and 1996 to 2001
by René Morissette and Yuri Ostrovsky
Business and Labour Market Analysis Division
Analytical Studies Branch research paper series, No. 265
Also in Canadian Public Policy. 36 (3): 273–302 (2005).
Context
Family earnings instability may affect the well-being of individuals
in several ways. Unless they are fully offset by government transfers
and tax reductions, unexpected fluctuations in family earnings generate
unexpected changes in family disposable income. If borrowing constraints
are present, these changes in disposable income may move families away
from their preferred consumption path and thus, reduce their welfare.
High earnings instability signals high earnings uncertainty, which may
induce families to save for precautionary motives, affect the decisions
of their members regarding labour supply, self-employment, portfolio
allocation, schooling, and occupational choices and modify their fertility
behaviour. If individuals are risk-averse, and given that, social and
private insurance mechanisms do not completely eliminate economic uncertainty,
high uncertainty levels will decrease individuals' well-being.
Because it may increase the volatility of family income, high family
earnings instability may create stress and anxiety for families'
main earners, reduce their sense of control over their lives and potentially
increase their vulnerability to health problems in the longer run.
Objective(s)
This study examines how family earnings instability has evolved between
the late 1980s and the late 1990s and how family income instability
varies across segments of the (family-level) earnings distribution.
Findings
The study uncovers four key patterns. First, among the subset of families
who were intact over the 1982 to 1991 and 1992 to 2001 periods, family earnings
instability changed little between the late 1980s and the late 1990s.
Second, the dispersion of families' permanent earnings became much more
unequal during that period. Third, families who were in the bottom tertile
of the (age-specific) earnings distribution in 1992 to 1995 had, during
the 1996 to 2001 period, much more unstable market income than their counterparts
in the top tertile. Fourth, among families with husbands aged under
45, the tax and transfer system has, during the 1996 to 2001 period, eliminated
at least two-thirds (and up to all) of the differences in instability
(measured in terms of proportional income gains/losses) in family market
income that were observed during that period between families in the
bottom tertile and those in the top tertile. This finding highlights
the key stabilization role played by the tax and transfer system, a
feature that has received relatively little attention during the 1990s
when Employment Insurance (EI) (formerly known as Unemployment Insurance
(UI)) and Social Assistance were reformed.
Data source(s)
The study uses the data of the Longitudinal Administrative Databank (LAD).
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the full publication.
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