How Did Canada's Middle Class Get So Rich?

America's coldest neighbors now have the highest-earning middle class in the world. They have their homes to thank for it. For now.
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America's middle class has been richest in the world for decades, but as David Leonhardt and Kevin Quealy write in the Times' new site The Upshot, we've lost that distinction to our neighbors from the north.

Canada is officially home to the richest middle class on the planet, according to figures crunched from the Luxembourg Income Study Database. Here's the last 30 years of America's dwindling income advantage in a handy chart.

How did we lose the lead? The authors blame three broad factors: (1) Canada's education attainment is outpacing the U.S. and most of the world; (2) American middle-class market wages aren't keeping up with overall economic growth; and (3) Other governments are doing more to redistribute income to poorer families in other countries, particularly in western and northern Europe. 

One word that doesn't appear in the article, however, is housing. The U.S. is emerging from a catastrophic collapse of the housing market that obliterated household wealth for millions of middle-class families. Canada, however, is in the midst of a delirious housing boom and a personal debt craze that reminds some economists of the U.S. market exactly a decade ago (before you-know-what happened).

Here's a look at Canadian home prices from Jason Kirby, a columnist for Toronto's Maclean's magazine, using data from Robert Shiller through January 2014. (It assumes that Canada's home prices behaved like U.S. home prices before 1990, which is barely plausible, but whatever, just focus on the end of the graph.)

Shiller Canadian house price chart update

And here's an index of American home prices, using the same Shiller data. Note that the U.S. collapsed just before scratching 200, the red line that Canada is approaching.

Real US home prices (1890-2014)

One year ago, Matt O'Brien calculated that Canada's price-to-rent ratio was the highest among advanced economies, making it the "biggest housing bubble" in the world. Canada's historic housing boom (and our historic bust) comes at the precise moment in history that they pass us to grab the title of World's Richest Middle Class. Just a coincidence? 

Maybe. As the LIS data in the Upshot article shows, Canada's median earner has been gaining on America for decades, powered by a strong service economy, supported by a disproportionately large energy industry. Remarkably, U.S. GDP-per-capita has been more than 15 percent richer than Canada's for the last 25 years (see graph below), even as the median American worker has fallen behind the median Canadian earner. That's a pretty clear indictment of U.S. income inequality.

Still, as many economists like Atif Mian and Amir Sufi have have argued, strong housing markets support middle-class income growth just as housing busts wreck middle-class income growth. The effect can be direct (more houses means more construction jobs*) and indirect (when families feel richer from rising housing prices, they spend more across lots of industries, raising incomes). As Reihan Salam writes, "the central driver of the decline in employment levels between 2007 and 2009  was the drop in demand caused by shocks to household balance sheets."

On a personal note: I'm used to ending articles like this by writing "The upshot is..." This practice seems kind of cheeky when the article I'm writing about comes from a Times mini-site with the same name. So I'll do it just this once: The upshot is that Canada is a modern, energy-rich country (with more open doors to high-skilled immigration) whose riches are better shared between the upper- and middle-classes—and this has been to its credit for decades. But if you're seeking a proximate reason why Canada has passed the U.S. as the world's richest middle class this year of all years, it seems to me you have to consider the opposite trajectories of our real estate fortunes and household wealth. Canadians are standing on their rooftops screaming for more debt while too many Americans are buried under their houses.

________

*As Salam writes, "construction employment accounted for 7.6 percent of all employment in Canada," compared to about 4 percent in the U.S.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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