June 2001     Vol. 2, no. 6

Low income intensity: urban and rural families

Andrew Heisz

This paper examines low income intensity among urban and rural families for the years 1993 and 1997. Low income intensity incorporates both the more commonly known low income rate and the average depth of low income. Changes in the low income rate often understate changes in the economic well-being of low income individuals and families. By combining rate and depth information, low income intensity provides a more complete measure of low income.

The years 1993 to 1997 encompassed a period of economic growth in Canada when one might have expected some reduction in low income following the recession of 1990-1992. In real terms, the gross domestic product (GDP) grew 14% between 1993 and 1997, an average of just over 3% per year.

Despite the economy-wide expansion, the measure of low income intensity rose between 1993 and 1997 for both rural and urban families. The size of the increase was roughly equal in absolute terms for both types of families. However, since intensity was comparatively low in rural areas, its rate of growth was slightly higher—13.1% compared with 11.9% in small/medium urban areas, and 8.0% in large urban areas. Low income intensity also rose for self-employed farmers with unincorporated farms.

Underlying the rise in low income intensity were changes in market and transfer incomes. Market income for families with low income rose only slightly, or not at all, despite the growth in the economy, whereas transfers fell. Declines in transfer income were associated primarily with reduced Employment Insurance (EI) receipts. Social assistance receipts also declined, but to a lesser extent. Other transfers rose somewhat, but failed to offset these declines. EI decreases affected low income families in all provinces, but had the largest effect on rural families in the Atlantic provinces. Social assistance fell most for low income families in Ontario and Alberta.

The focus is on non-elderly families, because one objective was to look at income changes by source of income. Elderly families have a substantially different income mix than non-elderly families, which would have necessitated a different approach. Otherwise, the study encompasses all families and individuals. For convenience, individuals and families are referred to as 'families' (see Data source and definitions).

Low income intensity: a more completemeasure of low income

The low income rate is at best a partial indicator of low income. While it shows what fraction of the population is below a pre-determined cutoff, it does not indicate how far below they are—the low income gap. One could imagine a policy that gave money to the worst-off Canadians, but not enough to lift any recipients above the threshold. While this transfer would clearly make low income Canadians better off, it would not affect the low income rate. Low income intensity takes into account both the rate and the depth of low income (see Low income cutoffs).

Low income intensity is defined as the product of three factors: the low income rate, the low income gap, and the level of inequality of the gap:

Intensity = Rate x Gap x Inequality.

This yields a simple graphical interpretation of low income intensity—the volume of a three-dimensional box (Osberg, 2000). To make matters simpler, the third term is nearly constant in most cases, making it possible to display low income intensity in two dimensions as a function of the rate and the gap.  2 

The overall level of low income intensity increased between 1993 and 1997 (Chart A). Over the period, low income intensity rose by 9.9% (Table 1). A substantial fraction of this rise was due to an increase in the low income gap. Roughly speaking, the growth in low income intensity equals the growth in the low income rate plus the growth in the gap. Thus, about one-third of the rise in low income intensity was due to an increase in the gap, the remainder due to an increase in the rate.

What lay behind the increase in low income intensity? Did low income families receive less income from market sources, or did transfers decline?  3  This can be answered by considering changes in incomes by source for the population of families at risk of being in low income—that is, families whose market incomes were below the low income cutoff based on income after tax (LICO-IAT). These 'low market income families' are families whose income from market sources does not surpass the cutoff—although some of these families may not be in low income after income from transfers is factored in. Changes in the amount and composition of income for this group shed light on the relative contribution of market and transfer incomes to the low income rate and gap, and hence low income intensity.

After tax income fell by $1,300 between 1993 and 1997 for families with low market income (Table 2). The largest contributor to this decline was the $1,100 drop in EI benefits received by these families. Social assistance also fell (-$500), whereas other transfers rose slightly. Market earnings were virtually unchanged. The lack of increase in market earnings is surprising given the GDP growth enjoyed over this period, and suggests that families not in low income benefited more from this growth.

The preceding discussion shows that low income intensity is useful for two reasons. First, it is a more complete indicator of income deprivation among low income families than the traditional 'headcount' represented by the low income rate. The rate tells only part of the story, and important changes in incomes among low income families can be missed by focusing only on changes in the rate. Second, low income intensity can be useful for evaluating programs targeted at low income Canadians. Changes in the economic well-being of low income families may be missed by the low income rate, but they are always registered in measures of low income intensity (see also Myles and Picot, 2000).  4 

Low income intensity among rural and urban families

In 1993, low income intensity was lowest in rural communities at 0.145 (Table 3), and rose with urbanization class. In large urban areas, low income intensity was 0.226 (Chart B). Why this difference? Mainly, it occurred because the low income rate was higher in more urbanized areas. The low income rate was 0.182 in rural areas and 0.286 in large urban areas. There was much less difference in the low income gap. The average family in low income was 42.2% below the LICO-IAT in rural areas, and 43.5% below in large urban areas. Smaller urban areas had a lower gap than either the large urban or rural areas, but their low income rate fell between the two. The difference in low income rates between community sizes was primarily due to differences in expenditures on necessities (see Comparing rural and urban Canadians).

In absolute terms, low income intensity grew almost equally between 1993 and 1997 in each community size: 1.9 percentage points in rural areas, 1.9 points in small/medium urban areas, and 1.8 points in large urban areas (Chart C). However, since rural areas were growing from a smaller initial level, their percentage growth was higher: 13.1%, compared with 11.9% in small/medium urban areas, and 8.0% in large urban areas. These increases were driven in part by a rise in the low income rate, plus an increase in the low income gap. In rural areas and small/medium urban areas the increase in the rate was more important; in large urban areas increases in the rate and the gap played approximately equal roles. Again, increases in the low income rate understated the size of increases in the income deprivation faced by low income families. Over the 1993-to-1997 period, the low income population not only increased, but it also became economically worse off—which would not have been apparent from the low income rate.

Income by source

Low income intensity rose for both urban and rural families between 1993 and 1997. How did incomes change over the period? Net income for low market income families fell by $1,800 in rural areas, $1,500 in small/medium urban areas, and $1,000 for families in large urban areas (Table 4). The largest single contributor to the decline was a large drop in EI benefits. These fell by $1,600 for rural families, by $1,100 in small/medium sized urban areas and by $900 in large urban areas. At the same time, average market earnings failed to rise substantially, despite increases in aggregate real GDP. Real market earnings fell by $200 for low market income families in rural areas and small/medium urban areas, but rose marginally ($200) in large urban areas.

Social assistance also declined, particularly in urban areas. Although other transfers did increase, the amounts were not large enough to offset the declines in EI and social assistance. Total transfers fell about equally in percentage terms for each type of area: 20% in rural areas, 17% in small/medium urban areas, and 20% in large urban areas. Because transfers made up a larger part of net income for low market income families in rural and small/medium urban areas, the same proportional decrease in transfers had a larger effect on net income for these families.

Farm families

Farm families are those with more than $10,000 of gross income from unincorporated farms. Low income intensity rose for these families between 1993 and 1997 (Table 5). Low income intensity rose less for farm than non-farm families, but, because of its lower initial rate, the percentage growth was about the same. For farm families, rising low income intensity was associated with declines in EI and market income (Table 6).  5 

Provincial differences

Social assistance falls under provincial and local jurisdiction and these programs differ substantially in terms of eligibility and benefit rates. And eligibility for EI depends upon local unemployment rates, which differ between and within provinces.

Declines in EI income were most important for rural low market income families, particularly those in the Atlantic provinces, as well as in Quebec and British Columbia (Chart D). EI declined for other provinces and areas, but substantially less (relative to the LICO-IAT). In the Atlantic rural areas, EI dropped by 20.5% of the LICO-IAT in Prince Edward Island, 19.0% in Newfoundland, 16.4% in New Brunswick, and 8.5% in Nova Scotia.

Declines in social assistance income were most important for low market income families in Ontario, Alberta and British Columbia. Compared with changes in EI, changes in social assistance were smaller and less differentiated by area, although declines appeared slightly smaller the larger the urban area. Social assistance rose in Newfoundland, but changed little in other provinces. Social assistance fell by 4.2% of the LICO-IAT in rural Ontario, 4.1% in rural Alberta, 3.4% in rural British Columbia, 4.3% and 3.3% in small/medium urban areas in Ontario and Alberta respectively, and 3.2% in large urban areas in Ontario. Other declines were less than 3%. The introduction of family allowance in British Columbia served to offset declines in social assistance.  6  Also, market incomes fell or rose very little in most provinces, except Alberta (up $400).

Why do changes in transfers affect rural low-income families more?

In all communities, increases in low income intensity were associated with little increase in market income and declining transfer payments. Changes in transfers particularly affected rural low income families. For all levels of after tax income, families in rural communities received a larger proportion from transfers than families in large urban areas (Chart E). And, at the levels of income given by the LICO-IATs, a rural family received a 60% larger proportion of income from transfers than did a family in a large urban area. This is because of differences in both the cutoff level and the average fraction of income received from transfers at all levels of income. The former appears to have been more important.

This means that, other things being equal, for a given change in transfers, low income families in rural areas were affected more than those in urban areas. This was more because of differences in the level of the low income cutoffs, and less because rural families were more dependent on transfers (at any given level of income).

Conclusion

Low income intensity is a useful indicator for describing trends in low income. Unlike the low income rate, it is sensitive to changes in the amount of income received by low income families, not just whether or not they fall below a low income threshold. From 1993 to 1997, low income intensity showed larger increases in low income than did the low income rate. The increases in low income were related to a decline in transfers received by low income families. But the decline in transfers was only half the story. Also important was the slow growth in market earnings despite a generally improving economy.

In absolute terms, low income intensity increased equally for rural and urban families between 1993 and 1997. However, since it was growing from a lower base, the percentage growth was higher in rural areas. Associated with the rising low income intensity was little or no increase in market income and a decline in total transfer payments, especially EI benefits received by low income families. Transfers to families appear to have declined by a similar percentage for both urban and rural low income families, but because the latter received a greater fraction of income from transfers, the change affected them more than urban families. Low income intensity also rose for rural farm families. The EI shortfall was greatest in the Atlantic provinces, while social assistance dropped the most in Ontario, Alberta and British Columbia. Market earnings rose for families in Alberta and transfers from other sources (mainly family allowance benefits) rose for British Columbia families.

The ability to identify the importance of EI or social assistance in this change in low income intensity is limited in this study, and no conclusions can be drawn regarding the effect of changes in these programs on low income intensity. The analysis of the effect of all transfers is done in a 'first order' sense only, and this paper does not try to account for behavioural responses (possibly significant) to changes in a program.  7 

The years 1993 to 1997 reflected sluggish, but improving, economic conditions. Between 1993 and 1997, the unemployment rate fell from 11.4% to 9.1%.  8  As economic conditions improve, transfer payments could normally be expected to decline and market incomes to rise. However, the latter did not happen for families in low income. Nevertheless, the length of recession and the slow pace of recovery suggests that exhaustion of EI benefits and difficulty obtaining the minimum hours of work required to qualify for EI might have been an ongoing problem. In other words, the drop in EI received by low income families may have been due to a change in the program, or it might have happened even in the absence of changes to EI.  9  Atlantic Canadians in particular had difficulty meeting minimum entrance requirements and were more likely to exhaust benefits in 1997 (HRDC, 1998b). Other research has shown that the slow growth and program changes may both have played roles over this period. Between 1994 and 1997, low income intensity also rose in the United States. Provincial and state jurisdictions that saw less deterioration in macroeconomic conditions (like employment and unemployment), and unemployment insurance and social assistance benefits and eligibility over this period saw a smaller rise in low income (Osberg, 2000).

Equally as interesting as understanding why transfers fell for low income families in 1997 relative to 1993 is understanding why market incomes among low income families failed to rise in response to (slow) economic growth. Aggregate growth seen between these years appears not to have benefited families below the low income cutoffs. This is important because escaping from low income depends, in part, on finding employment. Getting or losing a job or a change in the number of earners in a family tends to have a major influence on moving in or out of low income (Picot, Zyblock and Pyper, 1999). Furthermore, small changes in the unemployment rate when unemployment is high may do little to affect the employment probabilities of low income persons. Just as persistently low unemployment in the 1990s contributed to improving the earnings of Americans at the bottom of the wage distribution (Mishel, Bernstein and Schmitt, 2001), several consecutive years of sustained growth and low unemployment—from 1997 through (at least) 2000—may serve to improve the market earnings of low income families in Canada.

Notes

1. For a detailed explanation, see "On poverty and low income," by I.P. Fellegi (Catalogue no. 13F0027XIE). This article is available on Statistics Canada's website (www.statcan.ca), under "Products and services," "Research papers (free)," "Personal finance and household finance."
2. Inequality is defined as 1 + G(X) where G(X) is the Gini coefficient of low income gaps. The Gini is a measure of inequality that ranges between zero and one, getting closer to one as inequality becomes higher. In terms of inequality in the gap, most families have a gap of zero, so empirically, G(X) is usually close to one—a relatively few families compose most of the low income gap. Families above the low income cutoff have gaps set to zero. Thus 1 + G(X) is close to two in most cases. Low income intensity is proportionate to the product of the rate and the gap. The low income gap is the average ratio of the income shortfall to the LICO-IAT for low income families.
3. Changes in taxes are also possible contributors.
4. Myles and Picot examined low income intensity among families with children. They used a different data source, but also found an increase in low income between 1993 and 1996, as a result of no increase in market earnings and decreases in EI and social assistance.
5. Farmers cannot qualify for EI on the basis of their farm income. EI for farm families must be associated with off-farm income by family members.
6. The British Columbia Family Bonus is a refundable tax credit commencing in July 1996 that extends the child tax benefit for residents of British Columbia. Provincial family allowance benefits for Alberta and New Brunswick are also included for 1997.
7. Changes to the UI/EI system from 1993 to 1997 include Bill C-113 (effective April 4, 1993) after which quits became disqualified from benefits; Bill C-17 (effective July 7, 1994) which raised the variable entrance requirement and raised the replacement rate for low earning claimants and claimants with families while lowering it for others; and Bill C-12 (effective July 1, 1996) which renamed UI to EI, introduced a declining scale of replacement rates for repeat users, and dropped maximum insurable earnings from $845 to $750.
8. Real GDP growth was: 1993: 2.3%, 1994: 4.7%, 1995: 2.8%, 1996: 1.5%, 1997: 4.4%. Unemployment rates were: 1993: 11.4%, 1994: 10.4%, 1995: 9.4%, 1996: 9.6%, 1997: 9.1%.
9. Research examining the declining EI beneficiaries to unemployed (B/U) ratio concludes that about one-half of the drop in this ratio over the 1990s was due to changes in the EI program, while another half was due to other changes like the duration of unemployment, and the difficulty workers had obtaining the minimum hours to qualify (HRDC, 1998b; Sargent, 1998).

References

• Heisz, A. Low Income Intensity Among Urban and Rural Canadians, 1993 and 1997. Catalogue no. 11F0019MPE, no. 161. Ottawa: Statistics Canada, 2001.
• Human Resources Development Canada. "The Market Basket Measure—Constructing a New Measure of Poverty." Applied Research Bulletin, 4, no. 2. Ottawa: HRDC, 1998a.
• ---. An Analysis of Employment Insurance Benefit Coverage. Applied Research Branch Strategic Policy Paper 98W35E. Ottawa: HRDC, 1998b.
• Mishel, L., J. Bernstein and J. Schmitt. The State of Working America, 2000-01. Ithica, NY: Cornell University Press, 2001.
• Myles, J. and G. Picot. Social Transfers, Earnings and Low-Income Intensity Among Canadian Children, 1981-1996: Highlighting Recent Development in Low-Income Measurement. Catalogue no. 11F0019MPE, no. 144. Ottawa: Statistics Canada, 2000.
• Osberg, L. "Poverty in Canada and the USA: Measurement, Trends and Implications." Canadian Journal of Economics 33(4) 847-877, 2000.
• Picot, G., M. Zyblock and W. Pyper. Why do Children Move in and out of Low Income? Changing Labour Market Conditions or Marriage and Divorce? Catalogue no. 11F0019MPE, no. 132. Ottawa: Statistics Canada, 1999.
• Sargent, T.C. The BU Ratio: Prospect and Retrospect. Working Paper 98-09. Ottawa: Department of Finance, 1998.
• Wolfson, M.C., and J. M. Evans. Statistics Canada's Low-Income Cut Offs: Methodological Concerns and Possibilities. Ottawa: Statistics Canada, 1989.

Author

Andrew Heisz is with the Business and Labour Market Analysis Division. He can be reached at (613) 951-3748 or andrew.heisz@statcan.gc.ca.

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