A recent news article stated that 48% of Canadians are on the brink of insolvency. This article was based on a recent study conducted by MNP Ltd which defined “The brink of insolvency” as being $200 or less away from insolvency every month. This figure has increased by two per cent from last quarter when it was measured at 46%.
“Canadians appear to be maxed out with no real plan for paying back what they have borrowed” says MNP President Grant Bazian. 54% of those that took part in the survey were worried about their ability to pay back their debt.
As more people lean towards insolvency, interest rates should be of concern. If interest rates increase, it could push considerably more people closer to bankruptcy. Luckily for them, the Bank of Canada (BoC) decided to hold the rates during their last announcement.
“This isn’t simply a matter of people living beyond their means. The reality is that too many households simply cannot make ends meet, however hard they try.” – Bazian said.
If unemployment is at all time lows, and the economy is supposedly growing year over year, why are people so close to insolvency?
One potential explanation is wage stagnation. Wage stagnation occurs when wages remain flat, decrease, or only increase slightly (i.e., keeping pace with inflation or barely beating it).
The topic of wage stagnation and its prolonged effects has gained a lot traction. In an article written by Rob Carrick in 2012, he believed that the young adults of 2012 had it harder than his generation did in 1984.
Rob gives great examples from his early 20’s when buying a house, a car, or funding his university/college degree was easily affordable. For instance, in 1984 his tuition was $1,000 using an inflation calculator that would be equivalent to $2,256 in 2019.
However, with a little research we see that average tuition cost in 2019 is around $6,571. That is the equivalent of $2,911 in 1984. What students are paying today for one year of tuition would be roughly three years worth of tuition in 1984.
If we look at Carrick’s example of housing costs, his point is quite compelling. In 1984 the average after-tax family income was $48,500 (this would be about $109,500 in 2019). A house at that time would have costed a family roughly 1.6 times its annual income (i.e., $77,600 for the average family).
Using Rob’s example of 2009 data, a house costed roughly 6 times a family’s annual income. Yes, we have had the housing bubble burst and the financial crisis in 2008. However, a house still costs considerably more than 1.6 times a family’s annual income today.
The median household income in Canada for 2018 was just over $71,000 (nowhere close to the $48,500 of 1984, in today’s dollars). If housing was only 1.6 times the median family income, the average house would cost roughly $115,000.
The average cost of a house sold in December of 2018 was $472,000. This figure even takes into account a 5% decrease through the 2018 year.
Assuming the average family makes $71k and the average house cost $472k… That is a multiple of more than 6.5 times the families annual earnings.
So how does an economy riddled with debt fix stagnated wages? This is the million dollar question.
Leading economists in many areas have been tasked with figuring this out but there is yet to be any viable reason found. In Steve Denning’s article he quotes multiple economists regarding their perplexity on wage stagnation. In the article, a variety of potential causes for wage stagnation are listed, none of which are particularly conclusive.
However, Denning does shed some light on why he believes wage stagnation exists.
In 1980 and thereafter, there was a critical shift in what firms believed their main purpose was: to maximize shareholder value. Public companies for decades have now been solely focused on maximizing shareholder value.
This critical shift led to company executives being largely compensated by stock options to enforce the ideal of shareholder value being of utmost importance. Hedge funds reinforced this idea with corporate raids on companies that were reluctant to accept this doctrine.
Companies no longer cared about the other stakeholders; customers, employees, and the community. They were (and majority still are) solely focused on shareholders.
Shareholder value gives little to no concern about long-term viability and growth. It only seeks to maximize short-term gains, often at whatever cost necessary. Most times, this cost comes to employees in terms of layoffs, pay cuts, and hindered career development.
If more companies start focusing on long-term viability, short-term profits will follow. Jack Ma, CEO of Alibaba, said “customers are number one; employees are number two and shareholders are number three.”
There are many great examples of companies making the shift away from shareholder value: Amazon, Apple, Samsung, Uber, AirBnB, etc. Many more are following suit. The result? Increased long-term viability and increased short-term profits.
So, how do we tackle the wage stagnation conundrum? We stop championing shareholder value above everything else.
In 2009, Jack Welch former CEO of GE, who was seen as the king of shareholder value, agreed that focusing on shareholder value was “the dumbest idea in the world”.
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