Analysis and Opinion

By Jim Stanford

Jim Stanford is economist and director of the Vancouver-based Centre for Future Work and Harold Innis Industry Professor of Economics at McMaster University. This is a synopsis (slightly edited for length) of Stanford’s two-article series that first appeared here and here in Policy Options magazine

It is misleading to use per capita GDP to grade Canada’s overall economic performance or, as it often is used, as a proxy for measuring living standards.

Per capita GDP is a simple ratio of the total value of goods and services produced for money in an economy divided by that jurisdiction’s population.

The math sounds easy. But the methodology is complicated. Equating average output per person with the standard of living in a country is not credible.

Per capita GDP has a numerator (GDP) and a denominator (population). Canada’s numerator has not performed badly by international standards.

Real GDP growth over the past decade averaged close to two percent per year, despite a shallow recession in 2015 and a bigger downturn during the COVID-19 pandemic. That’s the second fastest among G7 economies, behind only the U.S.

It is the denominator, therefore, that explains Canada’s seemingly poor performance by this measure. GDP has grown but not as fast as the population.

Indeed, in recent years, Canada has had its fastest population growth since the 1950s. The population grew by three percent in each year of 2023 and 2024, almost entirely due to immigrants – two-thirds of whom were non-permanent arrivals (on temporary work or student visas).

The impact of rapid population growth on an arbitrary statistical ratio hardly proves a broader economic failure.

The link between immigration and GDP is indirect and felt with a time lag. Canada cannot expect the arrival of new Canadians to immediately boost GDP in the same proportion as the existing population for many reasons. It takes time to find work, gain skills and develop productivity.

Any surge in immigration will normally result in lower average per capita GDP, but that doesn’t mean Canada’s previous residents suddenly became poorer. It simply means that Canada is absorbing new people to lay the groundwork for future expansion. The resulting decline in per capita GDP cannot be interpreted as evidence of a more general malaise.

It is also worth noting that many of the business voices now bemoaning Canada’s per capita GDP performance were the same voices demanding more access to temporary foreign labour after COVID-19 (to solve purported labour shortages and reduce wage pressures).

It’s contradictory for them to now complain about poor GDP per capita resulting precisely from the temporary immigration they demanded.

GDP itself – the numerator of the ratio – encounters numerous conceptual and methodological questions, casting further doubt on its validity as a measure of living standards.

GDP includes many components that have no direct bearing on the quality of life of Canadians, such as depreciation, real estate commissions and imputed rents on housing.

It is tricky to measure real GDP over time and even trickier to compare it across countries, different currencies and different prices.

Moreover, simple per capita averages ignore how GDP is distributed. Only about half of the GDP is paid to workers. Much is captured in profits and investment income, disproportionately concentrated at the top of the income ladder.

Very high incomes for a rich elite can pull up average GDP per capita figures, even when most members of a society face hardship.

International per capita comparisons are misleading

The top four countries on the International Monetary Fund’s per capita GDP ranking are all tax havens: Luxembourg, Switzerland, Ireland and Singapore.

A fifth, Liechtenstein, is not included due to incomplete data, but its GDP per capita (US$186,000) is the highest of all – helped by the fact that its population is just 40,000.

These countries receive inflows of profits from global companies lured by low corporate taxes and lax banking rules. Those inflows boost GDP per capita (with profits credited to local subsidiaries of those global firms), but have little impact on work, production or living standards.

Ireland, for example, has recorded the fastest growth of real GDP per capita of any OECD country over the last decade and its GDP per capita is purportedly twice Canada’s.

Ireland is a wonderful, fascinating place. But any visitor can immediately confirm it is not rich. Average living standards (evidenced by wages, housing, health and poverty) are no higher and, by some measures lower, than Canada’s.

Because Ireland’s corporate tax rate is lower than other European Union countries, global multinationals have established Irish subsidiaries to receive intracorporate transfers. In 2023, more than half of all net value added in Ireland consisted of business profits – two thirds of which belonged to foreign firms.

GDP per capita has soared but living standards have not. Because the whole model is driven by corporate tax avoidance, the Irish government’s ability to capture some of that largesse for domestic use is constrained.

Newfoundland's case shows the flaw of using per capita GDP

The vagaries of per capita thinking are equally visible in Canada. Consider Newfoundland and Labrador.

After the development of offshore oil resources in the 1990s, that province’s GDP grew rapidly. Some of the new wealth trickled down to residents, but not as much as might be assumed.

By 2006, per capita GDP in Newfoundland and Labrador exceeded the Canadian average. Its new status as a “have” province was significant beyond provincial pride. It meant that Newfoundland and Labrador soon stopped receiving federal equalization payments.

However, personal incomes in the province remained below national averages. Over the last five years, Newfoundland and Labrador’s GDP per capita was 6.1 percent higher than the Canadian average, yet personal income per capita (including government transfer programs) was 3.4 percent lower. Exacerbating this anomaly, Newfoundland and Labrador’s population shrank through the 2000s.

Population decline is negative for any economy, but it has the perverse effect of artificially boosting GDP per capita (by shrinking the denominator). This further eroded the province’s chances of receiving equalization.

Much of the GDP associated with offshore oil literally never touches ground in the province. It is shipped overseas by tanker, with most of the profits appropriated by petroleum firms headquartered on the mainland or in other countries. Because of this, the province’s GDP is skewed heavily toward corporate profit. That’s good for business but doesn’t enrich its residents.

Little wonder then that the province is challenging the federal equalization formula in court. Last year, shrinking oil revenues pushed the province’s GDP per capita back slightly below the Canadian average, so Newfoundland and Labrador will now receive (small) equalization payments once again.

But this experience confirms per capita GDP is no way to measure the true well-being of a province or a country.

The goal of economic policy is not to maximize an abstract statistic. It should be to enhance the well-being of people. Per capita GDP is not an accurate or reliable measure of progress toward that goal.

Part 2: No, Canada is not poorer than Alabama

Some business and political commentators cite a growing gap between the per capita GDP of Canada and the U.S. as evidence of Canada’s purported economic dysfunction.

Some even conclude that because of stagnating per capita GDP, Canada is now poorer than Alabama – a state with widespread poverty, low incomes and short life expectancy.

This far-fetched conclusion reflects deep flaws in the use of per capita GDP as a measure of prosperity and living standards.

GDP per capita ignores important issues such as what is included in GDP, who owns it and how it is distributed. International comparisons are further complicated by necessary adjustments for exchange rates, price levels and population estimates.

Comparing GDP per capita between Canada and the U.S. is especially fraught because of other methodological problems

For example, the much larger proportion of unauthorized immigrants living in the U.S. artificially boosts its apparent per capita GDP. There are an estimated 11 million people there who contribute to the numerator (GDP) but are not counted in the denominator (population).

Similarly, per capita GDP ignores the value of time. In 2023, the average employed American worked 114 hours longer than the average employed Canadian – about three weeks more of full-time work.

American working hours are among the longest of any OECD country because low wages compel many of them to work extra hours or even second jobs and because there are no legal requirements for paid vacation. Those longer working hours account for much of the Canada-U.S. gap in GDP per capita.

Another issue is the failure to consider the environmental effects of economic production. Conventional GDP statistics take no account of the costs of pollution.

America produces more output per person, but takes fewer measures to protect the environment, which obviously affects the quality of life of current and future generations. Like time, nature is not free.

These methodological issues cast considerable doubt on the validity of simplistic Canada-U.S. comparisons.

Weak per capita GDP has been a longer-term trend

Attention to Canada’s per capita GDP grew during the federal election campaign. However, it is important to view the issue through a long-term lens. Canada’s per capita GDP has been sliding relative to the U.S. since the early 1980s.

Thanks to rapid industrialization, Canada largely closed the long-standing disadvantage versus the U.S. from 1950 through 1980.

Relative per capita GDP peaked in 1981 at 94 percent of the U.S. level. It then fell rapidly during the 1980s and early 1990s, to just 81 percent by 1992. It partially recovered in the late 1990s and 2000s but then fell again in the 2010s.

After fluctuating during the COVID-19 pandemic, Canada’s per capita GDP had fallen by 2023 to 78 percent of U.S. levels.

There is a natural tendency to put a political spin on economic measurements. However, there is no correlation between which party is in power in Ottawa and the evolution of this ratio.

Canada’s per capita GDP relative to the U.S. rose during Pierre Elliott Trudeau’s first years in office but began to fall during his final term. It declined most steeply under Brian Mulroney, was stable during the terms of Jean Chrétien and Paul Martin, fell during the last years of Stephen Harper’s rule and then declined further under Justin Trudeau.

Canada-U.S. per capita GDP comparisons reflect a complex mix of many determinants, including economic growth, sectoral changes, population growth, immigration, inflation and exchange rates.

It is far-fetched to conclude that any government deserves either credit or blame for its trajectory.

Canadians have a higher standard of living and well-being than Americans

Prosperity depends not just on how much is produced, but how it is distributed. Bank of Canada research shows most of the U.S. advantage in per capita GDP is concentrated among high-income earners.

Three-quarters of the gap in per capita output is captured by higher incomes for the top 10 percent of Americans. There is little difference in incomes between the bottom 90 percent in the two countries.

The richest 10 percent of Americans receive almost half of all pre-tax income, so their wealth significantly inflates the overall per capita average.

In fact, most Canadian workers earn higher wages than those in the U.S. It is most accurate to measure typical incomes by the median wage (the halfway point in a distribution), not the average (which can be distorted by very high incomes at the top).

The median hourly wage in Canada in 2023 was Cdn$28.79 or US$24.61 at the OECD’s purchasing power parity exchange rate.

The median hourly wage in the U.S. in 2023 was US$23.11. The typical Canadian worker thus earned 6.5 percent more than their U.S. counterpart, despite lower per capita GDP.

Perhaps surprisingly, the Canadian worker also paid a lower marginal federal tax rate (20.5 percent for full-time workers) than their U.S. counterpart (22 percent).

Of course, public services, not just private incomes, are also important to living standards. Canada’s more extensive health care, public education and other services enhance the quality of life in ways not captured by per capita GDP.

For example, eight percent of Americans have no health insurance and one-quarter are underinsured (facing out-of-pocket costs that force many to skip needed care). That takes much of the shine off a higher GDP.

For all these reasons, it is clear the typical Canadian has a higher standard of living than the typical American. We are healthier, live three years longer, face much less inequality and are happier.

These outcomes are not accidents. They reflect deliberate policy choices (including regulation, taxes and public programs) that shape both production and distribution to improve well-being.

In that light, Canada has continued to make progress in recent years – contrary to claims we have suffered a lost decade.

For example, the poverty rate (as defined by Statistics Canada’s market basket measure) fell by one-third between 2015 and 2022. Average real hourly wages (after inflation) are nine percent higher than a decade ago, despite post-COVID inflation. The average unemployment rate was lower over the last decade than the previous decade.

The United Nations human development index (HDI) confirms Canada’s success in converting economic activity into well-being. It attempts to directly measure living standards, rather than relying on per capita GDP to evaluate well-being. The HDI considers three components: per capita gross national income (GNI), life expectancy (a proxy for health) and education.

Canada ranked 18^th on the latest HDI scorecard, three places ahead of the U.S. Canada’s human development has improved more than twice as fast since 2010 as the U.S.

Canada ranks eight places higher on HDI than on GNI per capita – confirming the country efficiently improves human welfare with its economic resources. In contrast, the U.S. ranks 11 places lower on HDI than GNI, a bigger negative gap than any other developed country.

In sum, per capita GDP is a deeply flawed measure that says little about real-world living standards. To be sure, Canada has much to improve in its economy: not only to produce more but also to produce it more sustainably and use it more effectively to improve human and social conditions.

Nevertheless, the typical Canadian lives better than the typical American across a wide range of tangible indicators. Living standards for most Canadians have improved over the last decade, not cratered.

We should not be misled by one flawed, abstract measure into believing that Canada is somehow an economic basket case.

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