Exclusion of wealthy households from CPI among issues likely confounding Bank of Canada

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A few months ago, Bank of Canada Governor Stephen Poloz announced he was giving up on economic models as the Consumer Price Index (CPI) stubbornly remained at or below the Bank’s target minimum rate. Then suddenly the CPI rose and remained at or above the Bank’s target midpoint as other economic indicators continued to show slack. Last week Mr. Poloz attributed the recent price surge to “temporary effects” while announcing the Bank was exploring a ‘neutral interest rate’ policy, effectively abandoning inflation targeting.

A closer look at how the CPI is produced may shed some light on why the measure has confounded the Bank of late.

The CPI is based largely on two surveys, the CPI price survey and the Survey of Household Spending (SHS); both in turn rely on other Statistics Canada surveys. (Over)simplified, the expenditure survey is supposed to capture the composition and quantity of products and services Canadian households consume over the course of a year, while the price survey is supposed to capture the prices and price changes for those products and services.

While most StatsCan surveys employ what’s called probability sampling, the price survey, with rare exceptions, uses a form of non-probability (‘judgmental’) sampling. The selection of geographic areas, retail outlets in those areas as well as products / services sampled from those outlets is arbitrary, making it impossible to either estimate sampling variability or identify possible bias. (While StatsCan notes retail outlets are selected based on high sales revenues, cut-off sampling is not used.)

StatsCan’s Industrial Producer Price Index (IPPI) has used probability sampling since its inception in the 1980’s. Why the agency continues to use non-probability sampling in the CPI is unexplained.

The exceptions to the price survey’s ‘judgmental’ sampling are rents, hotel and motel accommodation, and textbooks.

Rent quotes are based on a special module attached to the Labour Force Survey (LFS). Problem is LFS respondents are cycled into the survey sample for six consecutive months at a time. This means rent changes for LFS respondents who happen to move outside the five month window (following their initial screening into the survey) are never captured. Since those who move generally do so once over the course of a year, many dwellings in the LFS sample never record a rent change. Comparisons of rent change with CMHC rent data suggest that CPI rents show too little price change.

The CPI basket weights are based on household spending patterns from SHS. While SHS uses probability sampling, its small sample size, questionable methodology and poor response rate produce results that do not accurately represent all Canadian households.

The SHS collects both household income and expenditure information, used to determine spending patterns for different income levels. However, capital gains are excluded from household investment income.

Compounding that problem is a ‘quality control tool’ that excludes households with a difference between receipts (income) and disbursements (expenditure plus net cash flow) greater than 30%. (User Guide for the Survey of Household Spending, 2009)

This means households generating a significant share of their income from capital ownership – a popular topic these days – are more likely to be excluded from the SHS by design. (Since expenditure from capital gains is necessarily included while the income itself is excluded.)

Not that such households needed help being excluded from the SHS; the survey is voluntary. [Its predecessor, the Family Expenditure Survey, was mandatory.] Current CPI basket weights are based on the 2011 SHS. Only about 2 of 5 sampled Canadian households responded to the survey in 2011, down from about 2 of 3 in 2009.

(Aside: StatsCan stopped producing public use microdata files (PUMFs), for SHS after 2009. For context, the US and UK household spending survey PUMFs have been updated through 2012.)

In addition to the high-income households excluded from SHS by design, a significantly greater share of households in ‘high-income strata’ simply don’t respond to the survey. (Survey of Household Spending 2009: Data Quality Indicators)

That’s a problem. As we’ve learned from Capgemini and other sources, Canadian high net worth individuals (HNWI) – the ones most likely to generate a significant share of their income from capital ownership – faired quite well following the Great Recession. The rest of the population, not so much.

While HNWI rising tides may not have lifted all boats, they would have lifted average household spending – and, by extension, average consumer prices. That is if their spending was accurately reflected in the stats, which it wasn’t.

Bottom line: While the CPI may be confounding the Bank of Canada Governor, an effort at fixing the StatsCan tools at the Bank’s disposal may be more worthwhile than abandoning the inflation indicator that’s supposed to guide its policy for anecdotal evidence and regular meetings with chief executives.

That is assuming the objective is well-informed policy. It would be unfortunate if the Bank of Canada is choosing to go the low-information route that the Government of Canada seems intent on travelling these days.

 

 

 

 

June 2014 LFS: An alternative view – The ‘self-employment’ report, Part 2

Chart 1 Self-employment and paid help
Chart 1 Self-employment and paid help

Source: CANSIM Table 282-0089 Labour force survey estimates (LFS), employment by class of worker, North American Industry Classification System (NAICS) and sex, unadjusted for seasonality, monthly (persons x 1,000), Statistics Canada

The ‘self-employment report, Part 1

After skimming through half a dozen national media and labour reports following the June 2014 Labour Force Survey (LFS) release this morning, it was surprising / disappointing that not one mentioned self-employment. All led with some variation of “Canada lost 9,400 jobs.” As indicated in Table 2 of the release, Canada supposedly lost an LFS-estimated 32,800 payroll jobs, the more modest 9,400 figure tempered by the estimated 23.400 gain in self-employment — with the usual caveat that all these monthly figures are meaningless as they’ll be revised in the coming months.

Effect on US, Canadian employment comparability

The problem is exacerbated when Statistics Canada’s LFS job figures are compared with the US Bureau of Labour Statistics (BLS) jobs data. While the BLS does have a labour force survey – the Labor Force Statistics component of the Current Population Survey – it only uses it to report the unemployment rate. The employment figure BLS releases on the same day as the unemployment rate is obtained from a separate employer payroll survey - Current Employment Statistics – which excludes both farm and self- employment.

For reasons not very well justified, StatsCan’s payroll survey  - Survey of Employment Payroll and Hours – lags two months behind the LFS. Since media and labour groups want to report both the unemployment rate and employment figure at the same time, and the LFS comes out first, we ended up with the unfortunate situation we have now. To repeat StatsCan’s LFS employment estimate is not comparable to that reported by the US BLS – since the LFS estimate includes farm and self- employment, it will always be (relatively) higher.

Self-employment should be excluded

Another reason self-employment should be excluded: While StatsCan collects hours worked from those self-identifying as self-employed, it does not collect earnings information from them. The reason’s kind of obtuse: Since the self-employed don’t earn a salary, and could re-invest their earnings into their business instead of retain it as personal income, any such information collected would be inconsistent and unreliable. There’s a fairly obvious solution: For those that identify as self-employed, have the interviewer ask them to provide only the earnings they retained as personal income.

As it stands, there’s no way to determine whether someone identifying as self-employed is earning a decent living, or simply opting to try self-employment for lack of payroll employment opportunities.

Without the benefit of earnings information, one possible – albeit crude – way of trying to assess successful self-employment is by looking at the trend in such enterprises with ‘paid help’, incorporated or otherwise.

Why not simply incorporated alone? Interesting fact: In the age of increasing precarious employment, more workers are employed as ‘perma-temps’. They may be continuously employed, but through temp agencies which provide them with a continuous stream of short-term contracts (either with the same or different employers).  Pretty much all such agencies offer temps two payroll options, the more attractive – being paid as an independent contractor – only available to those who (self-) incorporate. All of which is to say, it’s unclear how many incorporated self-employed without ‘paid help’ are actually working at their own enterprise, or working as contracted perma-temps.

 

2016 NHS: StatsCan to collect Social Insurance Number, despite not being authorised to do so (updated July 15, 2014)

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StatsCan requests SIN data for survey test run
Jennifer Ditchburn, The Canadian Press July 8, 2014

An interesting story idea that somewhat missed. A quick ‘told ya so’ (see What’s the end game) before proceeding.

A Social Insurance Number (SIN) can be used to obtain much more than just Canada Revenue Agency tax file data. That’s why the Government of Canada advises citizens to closely guard their SIN numbers from those not authorised to collect or use them.

Who can ask for my SIN number?
Frequently Asked Questions, Office of the Privacy Commissioner May 15, 2014 (last modified)

Annex 2 – Authorized Federal Uses of the SIN
The Social Insurance Number Code of Practice, Service Canada March 4, 2014 (last modified)

The referenced Privacy Commissioner and Service Canada pages both indicate the legislated and authorised users of Canadian SIN numbers. One agency absent from the list: Statistics Canada. The advice from both the Privacy Commissioner and Service Canada is that citizens shouldn’t share their SIN numbers with unauthorised users; at this point, that includes Statistics Canada. Whether that changes remains to be seen.

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The sorry state of Canadian civil liberties: Hate crime up, race primary motive

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Hate crimes in Canada: Most violent against gays, black people most targeted racial group
Craig Takeuchi, straight.com June 27, 2014

The referenced StatsCan release. As the article notes, the majority of all police-reported hate crimes (704 incidents, or 52 percent) were racially or ethnically motivated. Yet, remarkably, the few stories published focused on sexual orientation, a far less frequent motive (185 incidents, or 13%), albeit one involving greater incidence of violence.

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The sorry state of Canadian civil liberties: Defining away ‘diversity’

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Photo above appears to be from The Canadian Press (original source unknown). The white rubber wristband Justice Minister Peter MacKay wears is interesting – it’s popularly associated with the Make Poverty History campaign. Would be interesting to get confirmation if that’s indeed a MPH wristband. Among the issues discussed by the Canadian MPH campaign is homeless veterans - interesting, given the Support Our Troops lapel pin also worn.

Cynical symbology is a useful segue to the Mother’s Day greeting / supposedly sexist quip scandal Mr. MacKay finds himself facing, its absurdity highlighted with the recent open letters to and from his wife. What the beleaguered Justice Minister wrote or said is secondary to his (can’t stress this often enough) as well as previous Canadian governments’ policy decisions and resulting outcomes. And those outcomes are far worse for racial / ethno-cultural minorities than for women. Which begs the question(s): When/why/how did ‘diversity’ in judicial appointments become exclusively associated with female nominees, especially when the imbalance is many times greater for racial and other actual minority groups?

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