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Review of personal disposable income
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by Joe Wilkinson
Introduction
Personal income is the sum of all incomes received by residents of each province, including returns for labour and investments, and transfers from the government and other sectors (including old age security payments and employment insurance). Personal disposable income is the amount left over after payment of personal direct taxes, including income taxes, contributions to social insurance plans (such as the Canada Pension Plan contributions and Employment Insurance premiums) and other fees. It is a measure of the funds available for personal expenditure on goods and services and personal saving for investments as well as personal transfers to other sectors of the economy.
Chart 1: Per capita personal disposable income relative to Canada1
On a current dollar basis, personal disposable income per capita has increased in every province and territory over the past decade (see Appendix Table 1). On a per capita basis, personal disposable income (PDI) has remained relatively constant over the past decade in most provinces and territories relative to the national level as shown above in Chart 1.
Most provincial and territorial residents have similar amounts to spend on goods or services or to invest in savings on a relative basis. However, Albertans and British Columbians have seen their relative positions change. Albertans’ share of PDI has expanded, while British Columbia’s residents have seen their relative position deteriorate. British Columbians’ PDI is now less than the national average on a per capita basis.
Chart 2: Wages, salaries and supplementary labour income per employee relative to Canada2
Labour income per employee relative to the national average shows a pattern very similar to PDI. In Alberta, there has been growth in employment in goods-producing industries relative to service industries, notably construction, manufacturing, mining, and oil and gas industries. Average incomes in the mining, and oil and gas industries, in particular, are significantly higher than in other industries. In British Columbia, growth in employment in services-producing industries has been greater than in goods-producing industries. From 1997 to 2002, serviceproducing industries’ salaries per employee in British Columbia were about 80% of goods-producing industries. During this period, employment in service-producing industries increased 10.6% while employment in goodsproducing industries decreased 5.5%.
Chart 3: Unemployment rate
In addition to the impact of labour income, PDI per capita can also be influenced by the unemployment rate and the participation rate. As the unemployment rate decreases, a greater percentage of the labour force is earning labour income and this would increase PDI on a per capita basis if other factors remained constant. The unemployment rate in Alberta fell over the entire period and the pattern of change was similar to the pattern of change for Canada. Over the period the unemployment rate in Alberta fell 4.1% while it fell 4.5% for all of Canada. As Alberta’s change in unemployment is similar to Canada’s, the impact of PDI per capita was limited.
In British Columbia, unemployment fell from 10.2% in 1992 to 8.5% in 2002. Relative to the rest of Canada, this was a smaller decline in unemployment and as a result, the change in unemployment in British Columbia is a factor which influenced its relative decline in PDI per capita.
Table 1: Participation rate
| 1992 | 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| % | |||||||||||
| Quebec | 62.5 | 62.2 | 62.3 | 62.1 | 61.9 | 62.1 | 62.6 | 62.8 | 63.2 | 63.6 | 65.1 |
| Ontario | 67.3 | 66.8 | 66.0 | 65.6 | 65.6 | 65.8 | 66.0 | 66.6 | 67.2 | 67.3 | 67.8 |
| Alberta | 72.2 | 71.7 | 72.1 | 72.3 | 72.3 | 72.1 | 72.5 | 72.6 | 72.2 | 72.3 | 73.0 |
| British Columbia | 66.9 | 66.7 | 67.2 | 66.3 | 65.7 | 65.6 | 64.9 | 65.1 | 64.9 | 64.1 | 64.9 |
| Canada | 65.7 | 65.4 | 65.2 | 64.9 | 64.7 | 64.9 | 65.1 | 65.6 | 65.9 | 66.0 | 66.9 |
The participation rates3 indicate that in Alberta there is greater percentage of the population who are part of the labour force. As a result, on a per capita basis, PDI would be greater as the percentage of the population who would generate current labour income is greater. In British Columbia, the participation rate is falling and there are less people as a percentage of the population who can generate current labour income over the period. While Alberta’s participation rate is high, it has remained relatively stable over the period and it should not have impacted its change in PDI. However, British Columbia’s falling participation has impacted its PDI.
The participation rate would be affected by an increasing percentage of the population who are retired. From a national accounting perspective, amounts received by retirees as pension or other forms of retirement income are not considered current income but a drawing down of savings (or wealth) from past periods.
Chart 4: Direct taxes per capita
Direct taxes, such as income tax, are deducted from personal income to derive disposable income. The taxes are influenced by the trend in income, the tax base, and by changes in its composition. They are also affected by tax rate increases or decreases by provincial and federal governments. The patterns of change in direct taxes on a per capita basis are similar across most provinces. However, in British Columbia, direct taxes per capita have fallen most significantly to almost the same level as at the beginning of the period. This change would have a positive impact on PDI in B.C., particularly at the end of the period where direct taxes in B.C. are falling more rapidly than elsewhere. It would offset some of the effect of the relative decline in terms of wages, salaries and supplementary labour income, increasing relative unemployment and the falling participation rate.
Chart 5: Per capita contribution to social insurance plans
Contributions to social insurance plans (such as the Canada Pension Plan contributions and employment insurance premiums) are also deducted from personal income to derive disposable income. As with direct taxes, the provincial patterns of change in contributions to social insurance plans are similar. They are not responsible for the relative changes in PDI.
Chart 6: Personal savings rate
Personal saving is the amount left after deducting personal expenditure on consumer goods and services and personal transfers to other sectors from personal disposable income. Saving can be used for investment purposes (both financial and non-financial) as well as to reduce outstanding debt; in other words, to accumulate wealth.
The personal saving rate is defined as personal saving expressed as a percentage of personal disposable income. Most of the provinces have shown a similar propensity to save. But, British Columbia’s personal saving rate is markedly different. Since 1997, British Columbians have been spending more than their current personal disposable income on consumer goods and services and transfers to other sectors. In other words, they are dissaving.
Table 2: Total net worth per capita
| 1999 | |
|---|---|
| $ | |
| Newfoundland and Labrador | 48,726 |
| Prince Edward Island | 85,456 |
| Nova Scotia | 73,391 |
| New Brunswick | 71,702 |
| Quebec | 87,280 |
| Ontario | 107,561 |
| Manitoba | 82,877 |
| Saskatchewan | 96,053 |
| Alberta | 106,634 |
| British Columbia | 125,264 |
| Canada | 100,156 |
Accumulated wealth4, which includes retirement saving from prior periods, is a potential source of funds which can be drawn upon to supplement current income in order to finance current personal expenditure. When drawn upon, this source of funds appears as dis-saving in the national accounts, and takes the form of reductions of assets in the financial transactions account. This source of funds for pensioners is their retirement income. On a per capita basis, residents of British Columbia had the largest pool of personal wealth from which to draw in 1999.
Summary
Changes in wages, salaries and supplementary labour income have the most significant impact in terms of the relative shifts in PDI. More employees in Alberta work in industries where wages, salaries and supplementary labour income are higher. In British Columbia, there has been a shift to employment in industries where wages, salaries and supplementary labour income are lower (i.e. services industries). Unemployment has affected the relative decline in PDI in British Columbia as it has fallen less than elsewhere. In addition, the participation rates have affected PDI in British Columbia where a falling percentage of the population is generating current labour income. On a per capita basis, personal spending by British Columbians has grown faster than current incomes. Under these circumstances, spending can be sustained by drawing down personal wealth. As populations age in all provinces, spending funded by drawing down wealth rather than spending funded from current income is becoming more evident.
Appendix table:
