Income gap widens as higher interest rates reduce income for lowest income households
Income inequality increased in the third quarter as the gap in the share of disposable income between households in the two highest income quintiles (top 40% of the income distribution) and two lowest income quintiles (bottom 40% of the income distribution) reached 44.9%, up 0.5 percentage points from the third quarter of 2022.
The lowest income households—those in the bottom 20% of the income distribution—were the only income group to reduce their average disposable income in the third quarter of 2023 relative to the same quarter of 2022 (-1.2%). Gains in average wages and salaries for the lowest income households (+3.0%) were more than offset by reductions in net investment income (-43.4%).
While higher interest rates can lead to increased borrowing costs for households, they can also lead to higher yields on saving and investment accounts. The lowest income households are more likely to have a limited capacity to take advantage of these higher returns, as on average they have fewer resources available for saving and investment.
Higher interest rates weighed on average disposable income for the lowest income households in the third quarter. Along with a doubling of the Bank of Canada's policy interest rate from 2.5% in July 2022 to 5.0% as of July 2023, net investment income declined for the lowest income households in the third quarter of 2023 relative to a year earlier. The lowest income earners reduced their net investment income as increased interest payments, more than half of which was due to consumer credit, outweighed gains in investment earnings.