In a recent article in this webzine, fellow economist Jean-Luc Migué argued that Quebec catching up with Ontario economically was the result of changes in the distribution of the population. His logic is that the faster pace of population growth in Ontario (relative to Quebec) generated an increase in the price of land (rents) that was much faster in Ontario than in Quebec. This means that once you adjust for prices, Quebec has converged toward the level of living standards observed in Ontario in spite of slower economic growth. According to this logic, it is easy to explain the fact that real income per capita in Quebec has increased faster than productivity in the past few decades. This argument is well supported by economic historians, and appears to be true. However, it is not because it is true that its explanatory power is sufficient to explain a large part of the economic reality.

While the mechanism described by Mr. Migué (and his colleague Gérard Bélanger in another paper) may be true, the consideration of other factors overwhelms the size of the effects of this mechanism. In reality, the income level in Quebec is greatly exaggerated and the differences in the cost of living are overestimated, and they are also misunderstood theoretically.

How large is the cost of living gap between Quebec and Ontario?

The statistics presented with regards to the cost of living differences between Quebec and Ontario are not provincial averages. More often, they are differences between Montreal and Toronto, which we take to represent provincial differences. On average between 2000 and 2009, the gap between Montreal and Toronto stood at 13.4%.(1) The problem is that these are hardly representative of provincial averages. Once we try to account for the weights of other cities, the gap becomes much smaller. Martin Coiteux estimated that in 2009, the provincial differences stood at less than 6%.(2) Estimates of the “basic needs” poverty line which compares identical baskets of goods and services to insure a modest but decent standard of living compiled by Chris Sarlo is also a good approximation of the gap in prices. It shows that in 1988, that difference stood at 9.7% and that the entire difference was explained by cheaper housing since food and clothing were more expensive in Quebec than elsewhere.(3) So the gap between Ontario and Quebec is much smaller than we are led to believe.

Low housing costs are the result of differentials in quality

Most of the argument put forward by Migué rests on the price gap for housing in Quebec and Ontario. However, the problem is that the demand for housing is itself a function of real income. When one chooses a residence, one fixes a price for monthly payments that one believes is affordable. This threshold is drawn as a function of what one’s remaining income will buy in terms of food, clothing, transportation and other goods and services. If income across regions is different but all non-housing goods are equally priced, the cost of “average” housing will be different. However, these differences will be mostly explained by differences in the quality of housing. In short, higher income areas will require more expensive housing.(4)
 

“The virtual stagnation relative to Ontario is indicative of the lack of success of Quebec’s statist model to generate economic convergence. It mirrors the slow pace of productivity increases, which is offset by interprovincial transfers to Quebec.”

Once we disaggregate the data, we find that Quebec has prices similar to Ontario’s with regards to non-housing goods and services. In his article, Mr. Migué admits as much when he points out that 90% of the price gap between Montreal and Toronto is explained by housing costs. But a deeper look at the data is even more convincing; Quebecers pay a higher price in nominal terms for identical food baskets, gasoline (before taxes) and identical clothing items.(5) Given the much lower level of nominal wages in Quebec, this means that Quebecers actually have a higher cost of living than Ontarians since they must work longer hours for identical goods. Moreover, the price gap between Ontario and Quebec is heavily distorted by the effects of subsidized prices for services like electricity, daycare and university tuition. All of these items share equal weights in the calculation of the price indexes for Quebec and Ontario, but they are cheaper in Quebec because of a deliberate policy to artificially lower the prices of these services. However, these are offset by higher income taxes, corporate taxes and payroll taxes, which are not captured by the different price indexes.(6) This creates the illusion that prices are lower in Quebec when in fact they are not; they are merely paid in a different manner. So in reality, the totality of the cost of living difference stems from differences in the cost of housing.

So, what we spend on housing (and thus the average cost of housing) is determined by the real income left to Quebecers after all goods and services needed are paid for. Lower incomes mean lower housing costs because of lower quality housing. And when you look at the data on the quality of housing in Quebec, there is a considerable lag. The average number of rooms, bedrooms and bathrooms is lower in Quebec than in Ontario. The homeownership rate is 10 percentage points below that of Ontario even if the rate of owned houses with mortgages is equal in both provinces. Households in Quebec also enjoy fewer complementary housing goods like Internet connections, cable television, personal computers, microwaves, and dishwashers relative to similar households in Ontario.(7) Not only are Quebecers less prone to become homeowners; what they rent is of much lower quality than what Ontarians rent. A 2004 study published by Statistics Canada shows that rents in Montreal less often include running water, heating, electricity, parking spaces and appliances than Toronto rents.(8) If we were to assume that, exogenously and without any increases in income, Quebecers would change their housing quality preferences to match exactly that of the Ontarians, rents would increase dramatically and most of the price gap discussed by Mr. Migué would vanish.

Quebec is less productive and hence poorer

On average, Quebec workers are less productive than Ontario workers, which translates into lower hourly wage rates. Consequently, workers in Quebec must work longer hours than workers in Ontario for identical goods. For example, the average Montrealer must spend 18.7% more time at his job to acquire an iPod 8gb than the average Torontonian.(9) The average Quebec worker must also work 22 minutes more than the average Ontario worker to acquire 100 litres of gasoline (before taxes), and 29.5 hours more for the acquisition of the food basket recommended by Health Canada. This applies to services as well since Quebecers must, on average, work 24% more for a cab fare of 8km and 15% more for a haircut.

Moreover, most of the convergence in real incomes on a per capita basis between Quebec and Ontario is the result of changes in the structure of households. The size of Quebec households has fallen faster than that of Ontario households. The thing is that larger households have economies of scale in their purchases, which increases their real purchasing power. This creates a statistical illusion that is biasing down income estimates in Ontario relative to Quebec. When we correct for this using the methods proposed by Statistics Canada, we find that Quebec’s per capita income in 1976 stood at 77.73% of that of Ontario. By 2006, it had merely increased to 78.01%—indicating a virtual stagnation over three decades.(10) Not only that, but that figure was higher in 1961 (before the Quiet Revolution) than in 1976, since it stood at 78.31%.(11) These results were confirmed by Martin Coiteux, with a different methodology, who points out that Quebec’s per capita income stood at 85.9% of Ontario’s in 1976 compared to 79.9% in 2006. Using these statistical adjustments, we find that the growth of Quebec’s per capita income matches the slow pace of productivity increases.

The virtual stagnation relative to Ontario is indicative of the lack of success of Quebec’s statist model to generate economic convergence. It mirrors the slow pace of productivity increases, which is offset by interprovincial transfers to Quebec. The sad but real fact is that Quebec is not a slow-growth and high-income region; it is merely a slow-growth region.

 

Vincent Geloso is a junior lecturer in economics at HEC Montréal and a PhD candidate in economic history at the London School of Economics.

From the same author

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(no 312 – 15 juin 2013)

▪ Les comportements sociaux des Québécois et l'emprise de l'Église entre 1945 et 1960
(no 304 – 15 octobre 2012)

▪ La loi 25 ou comment tuer les arts et les sports
(no 292 – 15 septembre 2011)

▪ A Match Made in Heaven: Morality and the Free Market
(no 291 – August 15, 2011)

▪ Eugenics and the minimum wage
(no 275 – February 15, 2010)

▪ More...

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