Income Mobility In Canada: From Generation to Generation

Every parent’s dream is to see the next generation succeed even more than their own. And yet, among many Canadians entering adulthood, the expectation of being able to achieve some of the same milestones that their parents met is viewed with an increasing degree of cynicism. Can these points of view be reconciled?

In order to do so, we need to look at a statistic called income mobility. Income mobility measures the ability of an individual or group to move up or down in income relative to the previous generation.

New studies compiled by Statistics Canada have shed light on the state of income mobility in Canada. Comparative studies of inter-generational earnings and income mobility largely rank Canada as one of the most mobile countries among advanced economies, such as Denmark, Finland and Norway.

Inter-generational income mobility can be seen as a measure of equality of opportunity: if mobility were extremely low, we might say that the vast majority of children raised in low-income households would remain low-income earners, and the majority of those raised in high-income households would become high-income earners. However, this is not true of the Canadian financial landscape, where more low-income households are raising children who go onto exceed the earnings potential of their forebears.

Researchers Yen-Hao Chen and Yuri Ostrovsky used a data set of mid-career earnings as reported by fathers and their sons to calculate an inter-generational income elasticity, or IGE. The IGE in Canada was found to be around 0.32—meaning that about 32% of the earnings differences among fathers’ generations will be passed on to sons. Putting this into practice: if a family earns $10,000 less than the average Canadian income today, their children’s livelihood will likely improve, earning only $3,200 less than that average by the time they have established careers.

Though the inter-generational change in income tells us a lot about the equality of opportunity, it does not necessarily tell us about real equality. Chen and Ostrovsky also broke down their data to show the differences between fathers’ generations who started in the bottom five percent of income, and those who started in the top five. The data showed that the path into top percentage income was significantly more difficult for children whose fathers were not also at the top of the income distribution. In contrast, a good deal of generational mobility is evident for sons born to very low-income fathers – an indication that while policies are working well to improve the quality of life for younger generations, there is still significant bias that keeps the wealth of top-income earners persistent across generational lines.