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Differences in income, wealth and debt across households are important—for the economy, for the health of the financial system and for monetary policy.

Watch Deputy Governor Sharon Kozicki speak to the Federal Reserve Bank of San Francisco about the significance of household differences. Read the full speech.

“Like other central banks, the Bank of Canada sets monetary policy for the whole economy. But that doesn’t mean our monetary policy affects everyone in the economy the same way. And it doesn’t mean our policy has the same impact on the economy overall, regardless of the characteristics and circumstances of the people in it.”

Sharon Kozicki, Deputy Governor

How household differences can affect economic recovery

Household differences matter, especially when the economy hits a downturn. Things like age, gender and income level can affect how individuals and households experience a recession and how easily they recover from it. And these differences can influence the downturn’s depth and duration.

For instance, low-income workers tend to:

  • be less likely to have job security
  • use more of their income to buy goods and services

In contrast, higher-income earners tend to save more. As a result of these differences, income inequality tends to rise during recessions. So when the economy hits a rough patch, consumption tends to fall. Businesses then cut production, leading to more job losses and a deeper downturn.

So it’s critical for governments and central banks to understand what’s happening at the household level. This helps them better tailor their policies to cut the length and depth of recessions.

How the Bank is working to better understand differences

At the Bank, we closely study household differences and the uneven impact of economic disruptions. For example, we’ve created a laboratory where economists, data scientists and other researchers work together—as they would in a science lab—to analyze:

  • how differences across households affect the economy
  • how to factor them into our policy decisions

This was important when the COVID‑19 pandemic hit because its economic effects on Canadians were particularly uneven.

The Bank’s latest agreement on its monetary policy framework with the federal government takes into account the uneven impact of economic downturns. We’ve committed to looking at a greater variety of labour market indicators so we can try to determine the level of employment needed to keep inflation on target.

Better data lead to better decisions

In recent years, we’ve invested in our ability to use robust data about households.

The lessons we’ve learned from digging deep into household differences have been vital to the Bank’s understanding of issues around:

  • the job market
  • household spending
  • household debt

And these lessons matter for both monetary policy and the financial system.

For example, the Bank has always been concerned about debt and being aware of who has it. That’s because high levels of debt can make households vulnerable when interest rates rise—especially if their debt levels are high compared with their income. In turn, this can create risks for the entire economy.

The level of household debt fell early in the pandemic, but it has since risen to above pre-pandemic levels. The rapid increase in house prices contributed to this because many households took on new mortgages that were large relative to their incomes. Those who accepted variable rates on their mortgage could see their payments increase as interest rates rise, leading some households to limit their spending on other things. This could affect the whole economy by slowing growth and possibly increasing unemployment.

Going forward, we’re not just going to assume that households are financially well positioned. Better data will help us understand exactly how changes to interest rates will affect households with different levels of income, debt and wealth.

The COVID‑19 pandemic is a good example of a downturn that affected Canadians in different ways.

Most people who could work from home during the pandemic kept their jobs and experienced little or no change to their income. At the same time, public health measures to contain the spread of the virus hit some services—such as restaurants, accommodation, travel and entertainment—particularly hard. Many people working in these sectors lost their regular source of income. Low-wage workers, especially women and young people, felt this impact more.

The unusual policy supports that the federal government put in place during the pandemic also had uneven effects. Some people received enough financial support to make up for their lost wages. Others, however, did not. Similarly, while some households with fewer opportunities to spend were able to reduce their debt, others took on more debt.

By early 2022, most of the pandemic’s uneven impacts on employment were reversed. As well, households across income groups were, on average, in healthier financial positions than they were before the pandemic.

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