September 5, 2017

And where did the gap come from anyway? Although it sounds as though opportunity is being taken away from younger workers they don’t have an exclusive on weaker wages.

Since 1970 average Canadian family incomes have dropped by about 40% after being adjusted for inflation.  A critical difference between then and now is that in 1970 75% of available men participated in the workforce while only 30% of women did.  Today the participation rates are 65% for men and for women.  What this means of course is that not only did average family incomes decline by 40% but individual incomes dropped significantly more than that.  In 1970 an average family was supported by one income, in 2014 it takes two income earners.

The CBC recently reported that younger workers, in their twenties, are earning significantly less than older workers, in their 50s.  While this is true, the report fails to talk about “why” the generational wage gap exists.  All workers are being paid less and less, relative to the cost of living, regardless of age.   Aging workers represent a growing segment of the population, baby boomers now make up almost 60% of the Canadian population, and some of them have held the same jobs for many years.

If someone started a career path in the seventies or even the eighties and they are still working in the same field, perhaps even for the same company, it is doubtful that their wages have gone down.  They may not have kept up with inflation but they haven’t gone down.  On the other hand new workers entering the workforce are forced to use minimum wage, just as their more senior co-workers did when they started, as a gauge of income status.   Minimum wage which has remained relatively static and has been totally outpaced by inflation for decades is further impacted by ever increasing taxation.

As these older workers retire, creating opportunity for advancement for younger workers, it is doubtful that there will be a resulting increase in earnings.   Already many of these older workers are seen as liabilities by the companies they work for as many private pensions are grossly underfunded.  Some companies have developed a strategy of attrition to gradually retire or lay off older workers who are entitled to defined benefit pensions and have replaced them with younger workers who not only do the same work for lower salaries but also will only receive defined contribution pension plans.

The long term implications of the generational wage gap has yet to be felt but we can be pretty sure that at some distant future time we will likely see a regeneration of the manufacturing sector.  Think about it, as downward pressure on wages continues, eventually it will make economic sense for manufacturing jobs that have left our shores for cheaper labour markets elsewhere to return.

And what does all of this have to do with insolvency?

Since the late 1970s the use of credit, credit cards in particular, has seen a meteoric rise one that runs counter to ever decreasing incomes.  As incomes have gone down credit use has gone up.  People are using debt (credit) as a means of closing the gap between living expenses and reduced incomes.  Insolvency proceedings have become a necessary solution to temporarily fix the gap.  The fix has been spurred on by reduced interest rates on mortgages allowing more people to enter the housing market and effectively providing them with an ATM – every 3-5 years when the mortgage renews unsecured debt (credit) is wrapped into the mortgage freeing up credit cards and lines of credit to augment incomes.

The use of debt to finance living expenses is seen everywhere from people buying groceries on credit, they tell their friends “they are doing it for the points”, to people taking out loans to buy RSP investments.  Typically the interest on the loan is higher than the interest on the investment – but at least they got a tax refund that will help make some minimum payments on credit cards.