Analytical Studies Branch Research Paper Series

11F0019MIE

Volume 2007
Number 297

Income Instability of Lone Parents, Singles and Two-parent Families in Canada, 1984 to 2004

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Income Instability of Lone Parents, Singles and Two-parent Families in Canada, 1984 to 2004

by René Morissette and Yuri Ostrovsky

Executive summary

The majority of Canadians spend a substantial period of their lifetime in a partnership and for this reason, we argue in Morissette and Ostrovsky (2005) that despite the importance of analysing earnings inequality and instability of individuals, it is also important to study these issues at the family level. Even though a significant minority of Canadians either remain unmarried or become divorced (or widowed), many of these individuals become lone parents. Lone parents and unattached individuals constitute a considerable portion of the population and are potentially more vulnerable to the effects of income instability as they may have fewer income smoothing options at their disposal.

We attempt to answer the following questions: Has there been a widespread increase in earnings instability among lone parents (especially lone mothers) and unattached individuals over the past 20 years? How do the trends in earnings instability among lone parents and unattached individuals compare to the trends among the two-parent families? What is the role of government transfers in mitigating differences in earnings instability across different segments of the earnings distribution among the above-mentioned groups? What is the role of the progressive tax system?

Overall, our study based on the Longitudinal Administrative Data base (LAD) paints a fairly complex picture of earnings instability dynamics in Canada over the past 20 years with no indication of widespread increases. Earnings instability varies considerably across age groups and income levels in both direction and magnitude. We find that family earnings instability is the lowest among two-parent families and highest among lone mothers, which is consistent with the notion of the vulnerability of lone mothers, particularly young lone mothers with further implications for family consumption. The earnings instability of unattached men has declined in recent years but is still somewhat higher than the earnings instability of unattached women.

Similar to Morissette and Ostrovsky (2005), we find that earnings instability varies considerably with employment income and is much higher among families in the bottom tertile (one third of all families) than among families in the top tertile. The magnitude of these differences varies for different age groups and family categories; however, it is fair to say that for two-parent families the bottom–top earnings instability ratio is generally smaller mostly due to lower instability in the bottom tertile.

Employment Insurance (EI) and Social Assistance (SA) are two important programs which partially compensate for earnings losses related to job loss. Combined with government transfers in the form of refundable tax credits and Canada Child Tax Benefit (CCTB), they provide a substantial reduction in income losses and thus reduce income volatility. The progressive tax system further reduces income volatility by restricting both income gains and income losses.

In all age groups, social assistance appears to be the single most important factor reducing income instability of lone mothers. For lone mothers, SA plays a much greater role in reducing income instability than for the two-parent families. In the youngest age group, for instance, it reduces instability in the bottom tertile by 32%. As social assistance has little effect on the lone mothers in the top tertile, this also results in the largest drop in the differences between bottom and top tertiles (23%). The impact of social assistance on instability is somewhat smaller for the 45-to-49 age group although it is still larger than the impact of any other factors.

Employment insurance also lowers income instability of lone mothers. In all age groups, it is the second most important factor mitigating instability among lone mothers in the bottom tertile. Overall, the reduction in instability (relative to market income) due to EI and SA in the bottom tertile varies between 32% and 48%.

The role of the progressive tax system has two different aspects. On the one hand, in all age groups, the instability of the after-tax income in the bottom tertile is lower than the instability of the total income although the reduction is 6% at most, and in some age groups it is close to zero. On the other hand, in some age groups the tax system has a larger effect in the top tertile, so the after-tax difference between bottom and top tertiles is actually larger for the after-tax income than for the before-tax income.

Among persons with positive earnings in all six years of the observation period considered, the most striking difference between the results for unattached individuals and those for lone parents is that for the former employment insurance is a far more important factor reducing instability than social assistance. Compared to the market income instability, the combined reduction due to EI and SA is 20% to 30% among unattached men (depending on age) and 15% to 27% among unattached women in the bottom tertile. As with lone parents, the tax system reduces income instability in both bottom and top tertiles so the impact on relative instability of the unattached individuals is small, particularly for men.

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