Quebec is not a slow-growth-high income region, it is merely slow growth

The article below is a reply to a good colleague of mine to his article on the Québécois Libre 

In a recent article in this webzine, fellow economist Jean-Luc Migué argued that Quebec’s economic catchup on Ontario 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 meant that, once you adjust for prices, Quebec has converged towards the level of living standards observed in Ontario in spite of slower economic growth. According to that logic, it is easy to explain the fact that real income per capita in Quebec has increased faster than productivity in the last few decades. This argument is well supported by economic historians and appears to be true. However, it is not because it is true that it 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 of Quebec is greatly exaggerated and the differences in the cost of living are also overestimated while also being theoretically misunderstood.

How great 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 mean as 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 representatives 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. Howerver, the problem is that the demand for housing is itself a function of real income. When one chooses a residence, he fixes a price for monthly payments that he believes to be able to assume. This threshold is drawn in function of what the remaining income will buy in terms of food, clothing, transports and other goods & 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]

Once we disaggregate the data, we find that Quebec has similar prices to Ontario with regards to non-housing goods and services. In his article, M.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 further look at the data is even more convincing; Quebeckers 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 Quebeckers actually have a higher cost of living than Ontario 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 reduce artificially the price of these services. However, these must be compensated 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 assumed differently. So, in reality, the totality of the cost of living difference stems from differences in the cost of housing.

So, what we spend with regards to housing (and thus the average cost of housing) is determined by the real income left to Quebeckers after all goods and services needed are assumed. 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 sacrifice on complementary housing goods like internet connections, cable television, personal computers, microwaves, dishwashers relative to similar households in Ontario. [7] Not only are Quebeckers 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, Quebeckers 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 translate in 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 hours more than the average Ontario worker to acquire 100 liters of gasoline (before taxes), 29.5 hours more for the acquisition of the food basket recommended by Health Canada.  This applies to services as well since Quebeckers must, on average, work 24% more for a cab fare of 8km and 15% more for a haircut.

Moreover, most of the convergence on a per capita basis in real incomes 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 in 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 the 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 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 the statist model of Quebec to generate economic convergence. It mirrors the slow pace of productivity increases whose slower pace of increase is compensated 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.

[1] Vincent Geloso. Forthcoming in 2014. Coûte-t-il vraiment moins cher de vivre au Québec? Le coût de la vie au Québec relativement au reste du Canada. Montréal : Centre sur la Productivité et la Prospérité à HEC Montréal.

[2] Martin Coiteux. Le Point sur les Écarts de Revenu entre les Québécois et les Canadiens des autres Provinces, Montréal, Centre sur la Productivité et la Prospérité à HEC Montréal, 2011. p. 12.

[3] Christopher Sarlo. Poverty in Canada — 2nd Edition, Vancouver, Fraser Institute, 1996. p. 115

[4] For a deeper discussion of the issue, consider the following articles:  Michael E. Stone. 2006. “What is Housing Affordability? The Case for the Residual Income Approach” Housing Policy Debate, Vol.17, no.1, pp.151-184; Donald Haurin. 1991. “Income variability, homeownership, and housing demand” Journal of Housing Economics, Vol.1, Issue.1, pp.60-74; Orazio Attanasio, Renata Bottazzi, Hamish Low, Lars Nesheim et Matthew Wakefield. 2012. “Modelling the demand for housing over the life cycle” Review of Economic Dynamics, Vol.15, issue 1, pp.1-18.

[5] Vincent Geloso. Forthcoming in 2014. Coûte-t-il vraiment moins cher de vivre au Québec? Le coût de la vie au Québec relativement au reste du Canada. Montréal : Centre sur la Productivité et la Prospérité à HEC Montréal.

[6] Vincent Geloso. 2013. Du Grand Rattrapage au Déclin Tranquille : Une histoire économique et sociale du Québec de 1900 à nos jours. Montréal : Accent Grave, chapter 3.

[7] Statistics Canada. 2013. CANSIM tables 203-0027 and 203-0019. Ottawa: Statistics Canada. Available online at

[8] James Chowhan et Marc Prud’homme. 2004. City comparisons of shelter costs in Canada: A hedonic approach. Ottawa: Statistics Canada, pp. 21-24.

[9] Andreas Höfert et Daniel Kalt. 2012. Prix et Salaires : Édition 2012. Zurich : Union des Banques Suisses, p. 8.

[10] Vincent Geloso.2013. Une perspective historique sur la productivité et le niveau des Québécois: de 1870 à nos jours. Montréal : Centre sur la Productivité et la Prospérité à HEC Montréal.


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