The Evolution of Canadian Income Dynamics: Evidence from Canadian Longitudinal Tax Records

Abstract

What does income dynamics look like for Canadian-born workers since the 1980s? We address this question by estimating a flexible nonlinear income model using panel data constructed from Canadian administrative tax records. A novel feature of our approach is the introduction of a proxy variable for post-secondary education attainments imputed from historical records of education deductions and tax credits. We find that the Canadian-born workers’ pre-tax labour income display state and history dependent persistence, such that a high rank income shock has long-lasting effects only for high income households, while a low rank income shock would decay over time at heterogenous rates influenced by current income status. The non-permanence of low rank income shocks is unique to Canadian-born workers and this feature is very consistent between 1985 to 2019. Following the 1964 birth cohorts over their entire life-cycle, we find the growth of income persistence occurs predominantly in the first ten working years and this feature is robust in subsequent birth cohorts. Lastly, we focus on cohorts who experienced recessions during their working years and find there are moderate changes in income persistence during these periods.

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