Persistence of High LICO Ratios in British Columbia

Archived Topic Box from the 2005 Fifth Annual Benchmark Report

British Columbia has historically had a high Low Income Cut-Off (LICO) ratio based on the percentage of families under the (1992 base) after-tax low income line. Between 1990 and 2003, BC had two eighth place ranks, and four each of seventh, ninth and last place (10th) ranks.

In our benchmarking reports we have attempted to provide some explanation for possible reasons for this poor performance. Unfortunately, the research available up to that point could not provide any solid answers but did provide suggestions for further research. The Board asked Statistics Canada to investigate the question: "Why does BC perform poorly on the low income cut-off measure?" This topic box provides an overview of the Statistics Canada technical paper results in as lay terms as possible.

The technical paper consisted of four comparisons for 2003: families in BC and Canada; individuals in BC and Canada; families in the Vancouver and Toronto CMAs; and, individuals in the Vancouver and Toronto CMAs. Prior research indicated we should investigate employment engagement and demographic factors such as family structure and size along with the age, immigrant status, education attainment, and education enrolment status of the major earner.

The results of the decomposition analyses of low income rate gaps – the difference between the low income rate in BC and Canada (or Vancouver and Toronto) – were similar for all categories but BC vs. Canadian families. The low income rate (LIR) gap between families in Vancouver and Toronto is explained by differences in employment engagement. This reflects the fact that families in Vancouver were almost twice as likely to have no connection whatsoever to the labour market as families in Toronto (10.2% versus 5.3%). Vancouver also had higher shares of families wherein the principal earner worked less than a full time schedule. Little or none of the LIR gap was explained by demographic factors such as family size, age, immigrant status, education and enrolment status. The story among unattached individuals in comparisons between BC and Canada and Vancouver and Toronto was essentially the same.

The decomposition analysis of the LIR gap between BC and Canadian families was not as conclusive; 59% of the gap remained unexplained. Specifically, the analysis indicates that with the exception of immigrant status, very little of the BC-Canada low-income difference is due to demographic differences. This includes family structure and family size, as well as age, education, and student status of the major earner. The analysis suggests that about 13% of the difference could be ascribed to differences in immigration status, a further 28% to lower employment engagement in BC, and that the other factors are not relevant in explaining the gap.

Of particular interest to the Progress Board in commissioning the Statistics Canada report was gaining insight into why the LIR gap changed over time. Between 1997 and 2003, the difference in the LIR between BC and Canada among economic families widened from 0.7 points in 1997 to 3.2 points in 2003 (up 2.4 points). The results of a follow-up investigation by Statistics Canada indicate that roughly 63% of the rise inthe LIR difference was associated with BC families falling behind in their employment engagement over the period. For example, the share of families with no employment engagement fell from 10.9% to 8.8% in Canada between 1997 and 2003, while in BC it rose from 9.1% to 10.6%. Statistics Canada notes that these results are consistent with the explanation given for the 2003 difference in LIRs between BC and Canada with a large component explained by relatively low employment engagement in BC, plus a substantial unexplained component. In essence, between 1997 and 2003, the LIR gap between British Columbian and Canadian families expanded because employment engagement fell in BC while it increased in Canada. And, although low income rates fell in both jurisdictions, they fell faster in Canada than in BC.

The results of this technical paper suggested two areas for additional research. The first is to try and explain why BC had a lower labour market engagement than for Canada as a whole. Possible explanations for this are that BC attracts people who place relatively more value on leisure time and that BC's underground economy is possibly larger than elsewhere in Canada. The underground economy is considered in a topic box later in this volume.

The second area for follow-up research was to examine the relative strength of unexplained factors in the BC-Canada low-income gap among families. As a first step, Statistics Canada examined income from market and transfer sources for economic families whose income from market sources is so low as to place them on the cusp of low-income. Preliminary results using the Survey of Labour and Income Dynamics (SLID) database suggest that for 2003 BC families had higher market income and a lower tax burden, but that transfer payments were lower than for Canadian families. On average, the SLID data show that after-tax income among families with low-market income was roughly 6.1 percent lower in BC than in Canada in 2003. Unfortunately, the SLID data are not detailed enough to provide a breakdown of which transfers are lower. In order to provide a detailed breakdown, the BC Progress Board commissioned an additional analysis from the Small Area and Administrive Data Division (SAADD) of Statistics Canada.

The SAADD analysis of low income families using the Longitudinal Admininistrative Database (LAD) are generally consistent with the preliminary results for 2003: BC families had higher market income, a higher tax burden, and lower transfer payments. In sum, after-tax income for low income families was 5.6% lower in BC than in Canada in 2003.

At a finer level of detail, federal personal income taxes were approximately equal in BC and Canada ($1,000 vs. $980), but provincial personal income taxes were lower ($400 vs. $580).

Federal transfers were $700 lower in BC than in Canada, on average. Differences in transfers between British Columbia and Canadian families were relatively small for the individual transfers. For example, average amounts for employment insurance (EI) and the GST tax credit (GSTC/HSTC) were the same. The largest difference was $200 (4.9%) for the Canada Child Tax Benefit (CCTB). Federal taxes were $20 (2.0%) higher in BC than in Canada.

Provincial transfers were $800 lower in BC than in Canada, on average. Average transfers for workers' compensation (WCB) were $400 (4.0%) higher in BC than in Canada. Similarly, average income assistance payments were $500 (8.1%) higher in BC. British Columbia families receive $210 (43.8%) less, on average, than Canadian families in provincial refundable tax credits and family benefi ts (Ref. TC & Fam. Ben.). Offsetting this almost entirely is a $180 (31.0%) lower provincial tax burden.

Note: The "Total" categories do not represent the sums of the individual components because the populations that the averages are based on vary depending on whether or not the family reported income (or claimed credits). For example, average income after-tax for BC is not equal to the sum of average market earnings ($8,400 based on 459,125 families) plus average transfers ($9,500 based on 599,900 families) less average taxes ($1,400 based on 219,600 families). The $15,200 value reported is the average income after-tax for the entire sample of 609,785 families using market income plus transfers less taxes.