Financial Vulnerability in Canada: The Embedded Experience of Households 3030925803, 9783030925802

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Financial Vulnerability in Canada The Embedded Experience of Households Jerry Buckland Brenda Spotton Visano

Financial Vulnerability in Canada

Jerry Buckland · Brenda Spotton Visano

Financial Vulnerability in Canada The Embedded Experience of Households

Jerry Buckland Menno Simons College Redekop School of Business Canadian Mennonite University Winnipeg, MB, Canada

Brenda Spotton Visano York University Toronto, ON, Canada

ISBN 978-3-030-92580-2 ISBN 978-3-030-92581-9 (eBook) https://doi.org/10.1007/978-3-030-92581-9 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover credit: @Alex Linch shutterstock.com This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

This book is dedicated to Canadians who struggle to build their financial resilience and maintain their dignity against considerable odds.

Foreword

Do you trust me? Look at my signature at the end of this Foreword. Trust me about this book. Pay attention, not just because it’s the right thing to do, but because it matters to the selfish personal interest of middle-class people like you and me. Jerry Buckland and Brenda Spotton Visano have summarized for us a great deal of evidence about financial vulnerability. How does it arise, who suffers, what does it do to an individual and family? I also do research in this field. Let me tell you about financially vulnerable people. They are: • • • • •

Always stressed Hungry Afraid Don’t know where the next rent payment is coming from Worry every day if their children will end up on the street

What does that do to their behavior? People in this situation make more mistakes. They make foolish financial decisions like going to a payday lender, not because they are stupid or illiterate, but because stress does that to everyone. I make bad choices when I am too stressed, too. Then they suffer more than average from bad mental and physical health and end up in the medical care system. Some day I may need a personal support worker. They are paid badly and little-respected, most of them are immigrants to Canada, they have vii

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FOREWORD

insecure work and so may become financially vulnerable. All kinds of jobs are like that today. I need people to do all kinds of jobs in our society without making mistakes, to look after me. Do you think they will care for me or you properly if they are so financially vulnerable that they can hardly focus on their work? I also want a just society for everyone. I am deeply involved with making that happen in many aspects of my own life. But even without seeking justice and equity, my own interest is better served when we do our best to combat inequity, in this case in the financial systems. If everyone is on an equal footing, we will be richer both financially and spiritually. Banks make more money when everyone is in the mainstream. Our taxes won’t have to support so many stressed people who become sick because of it. Our financial systems and poverty supports have many good features, but they also discriminate against some groups, as the authors show clearly. We have the means to develop better systems, for everyone. Financial literacy education has its place, but it doesn’t do much good when a person is too stressed and faced with a crisis of paying the rent while the children are crying because the landlord is yelling at mom. Perhaps you will learn a great deal more by reading the whole book and I hope you do. But perhaps you don’t have time. Turn to the Policy Recommendations in the last chapter. Read about what we could do with interest rate limits, a wealth tax, more inclusive banking practices, better support for people to be employed. Trust me. The evidence supports their recommendations, and if I were writing them, I would use even stronger language. Now write to your MLA and your MP. Ask them to work toward these better policies, for all of us. Do it. We will all be richer. Chris Robinson, B. Comm., M.B.A., Ph.D., C.F.P® , C.P.A..,C.A. Professor Emeritus of Finance and Senior Scholar, Fellow of FP Canada York University Toronto, Canada

Acknowledgments

Our work is in many ways the product of the networks of people with whom we interact and to whom we are deeply grateful for their kindness, goodwill, and generous sharing of insights, experience, and efforts to make Canada a better society. Our first and highest debt of gratitude is to the participants in the Canadian Financial Diaries research project for their willingness, indeed courage, to share their experiences. Without their insights into the experience of living on the financial edge, we would not have this book. We acknowledge the considerable institutional support and privilege of working as tenured professors at the Menno Simons College (at the University of Winnipeg) and Canadian Mennonite University (Jerry) and York University (Brenda). That privilege affords us the luxury of a steady income and secure employment; we do not have to worry about being financially vulnerable at the current time thus allowing us the freedom to focus on researching it. Belonging to the university community gives us a direct connection to the networks of colleagues who have generously given of their time to discuss with us various issues that have helped to shape this book. We also thank Chris Robinson, Olga Biosca, Allison Meserve, and Bettina Schneider. The perspectives that inform this book have been shaped by our longstanding community partnerships. Early work on financial livelihoods and the poverty penalties benefited immensely from the contributions of front-line people at community agencies and organizations through the

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ACKNOWLEDGMENTS

Black Creek Financial Action Network. We thank the people at ABC Life Literacy Canada, ACORN, Community Financial Counseling Services (Winnipeg), Jane Finch Community and Family Centre (Toronto), Momentum (Calgary), PeachYouth (Toronto), Prosper Canada, SEED Winnipeg, and West Neighbourhood House (Toronto). Many of these organizations are involved with the ABLE Financial Empowerment Network. We are particularly grateful to Byron Gray, Elena Jara, Courtney Mo, John Silver, Barry Rieder, Lorna Schwartzentruber, and Louise Simbandumwe. Brenda thanks the many students with her Community Finance project including Qasim Abbas, Loretta Bailey, Yunus Bozkurt, Jian Hao Chiah, Andréanne Joanne Dibo-Amandy, Elizabeth Lotfali, Muhammad Shahmir Masood, and Joshua Mete. Jerry thanks the many research assistants with the Financial Diaries project including coordination by Jodi Dueck-Read and leadership provided by Wendy Nur and Jennifer Frimpong. He is also grateful for assistance from Greg Allan, Derek Bassey, James Cheng, Kriz Cusado, Erin Gietz, Maya Janzen, Carly Kublick, Isha Rani, Josh Richert, and Leah Wilson. Thanks also to the Media Department at the University of Winnipeg, particularly Greg Chase and Chris Sabel. We both have a long-standing working relationship with the Financial Consumer Agency of Canada as members of its Research Committee. The dedication and considerable contributions of the staff at the Agency and the other academic colleagues on the committee have been inspirational. We are most grateful for the national leadership and committed engagement of all the staff at the FCAC including, David Hayes, Rebecca Kong, Bruno Levesque, Marcia McLean-McKay, Geoffrey Pender, Chris Poole, Nicole Rivest, Jane Rooney, Ruth Stephen, and Stephen Trites. We thank members of the Research Committee for many fruitful discussions that have helped to shape our thinking including, Simon Brascoupé, Karen Duncan, Andrea Hasler, Jodi Letkiewicz, Allison Meserve, PierreCarl Michaud, Nicole Robitaille, David Rothwell, Bettina Schneider, Dilip Soman, and Jiaying Zhao. No work on Canadian socio-economic issues can proceed without funding and exceptional high-quality information. We are most grateful to the Social Science and Humanities Research Council (SSHRC) for the Insight Grant (435-2017-0032) that has funded the Canadian Financial Diaries research project. We are also grateful for data produced by Canada’s statistical agency. The recent work at Statistics Canada to

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make these high-quality data even more accessible has made our research process that much easier. The process of writing is always a struggle—iteratively moving back and forth between what one wants to say and how best to say it. Collaborating on this project has made that struggle so much easier—the contribution of this work is at once more significant in its import and more powerful in its message because of our collaboration. We thank Maureen Epp for her exceptional editing. Maureen’s suggestions for ways to smooth the rather rough patches in an earlier version of manuscript have made our message much clearer. We thank the staff at Palgrave Macmillan for all their support and especially Elizabeth Graber for her enthusiastic encouragement at the start of this project, Tula Weis for her ongoing support, and Meera Seth as the Economics Editor. We are thankful for the care taken in project coordination by Susan Westendorf, Uma Vinesh, and Shukkanthy Siva. Finally, Jerry thanks Tracey for her gracious care and the way she can inspire. And thanks to Daniel for his interest about all things to do with justice. Brenda thanks Livio and Dalubuhle, for their support, encouragement, and inspiration.

Contents

1

Introduction Defining Financial Vulnerability Financial Vulnerability: A Multi-dimensional Concept Why be Concerned with Financial Vulnerability? Nested Influences Chapter Outline Works Cited

1 2 6 7 8 11 13

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Theories and Evidence of Financial Vulnerability Consumer-based Explanations of Financial Vulnerability Institutional and Structural Explanations of Financial Vulnerability Financial Policies and Regulations and Consumer Financial Vulnerability Works Cited

15 16

Building a Financial Vulnerability Model The Canadian Financial Diaries Project Financial Diaries Participants Diversity in Financial Capability Agent or Structure? Financial Well-Being and Financial Vulnerability Finances and Overall Well-Being Analyzing the Financial Resilience of Diary Participants

35 36 37 38 39 43 44 46

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CONTENTS

Financially Resilient Financially Vulnerable In Financial Crisis Financial Resilience Pathways Conclusion Works Cited

47 49 50 52 54 55

Socio-Cultural and Economic Institutions at the Local Level Migrating Poverty from the Core to the Suburbs Social Exclusion, Poverty, Social Capital, and Development Class, Race, and Gender in Modest-Income Neighborhoods Housing, Retail, Food Security, and Health Conclusion Works Cited

57 57 60 63 76 87 88

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The Household as Financial Manager Financial Vulnerability as Over-Indebtedness Financial Vulnerability as More Than Over-Indebtedness Socioeconomic Characteristics of Vulnerable Canadians Financial Vulnerability as Subjective Stress Contributors to Financial Vulnerability Conclusion Works Cited

93 94 103 108 111 113 114 115

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Markets and Financial Institutions Financial Vulnerability and Basic Financial Services Landscape of Basic Consumer Financial Services Barriers, Benchmarks, and a Poverty Penalty Financial Technology Innovation Conclusion Works Cited

119 120 122 129 136 142 142

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Principles and Policy Recommendations Our Examination of Financial Vulnerability Policy Recommendations Conclusion Works Cited

149 149 159 170 170

Index

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List of Figures

Fig. 3.1 Fig. 3.2 Fig. 3.3 Fig. 3.4

Fig. 4.1

Fig. 4.2

Fig. 4.3

Nested model of household finances (Source Author’s own creation) Financial well-being and vulnerability (Source Author’s own creation) Dimensions of human well-being (Source Author’s own creation) Asset map of household (Source Based on sustainable livelihoods map, U.K. Department for International Development, see Solesbury [2003]) Poverty in select cities: number, percent, and average gap ratio, market basket measure, 2018 (Source Statistics Canada. Table 11-10-0135-01 Low income statistics by age, sex and economic family type. https://doi.org/ 10.25318/1110013501-eng) Poverty duration in Canada: percentage of low-income spells lasting five years or longer, 2011–2018 (Source Statistics Canada. Table 11-10-0026-01 Low income duration of tax filers in Canada. https://doi.org/10.253 18/1110002601-eng) Gendered poverty in select cities: percentage of persons with low income, market basket measure, 2018 base (Source Statistics Canada. Table 11-10-0135-01 Low income statistics by age, sex and economic family type. https://doi.org/10.25318/1110013501-eng)

42 43 46

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List of Tables

Table 3.1 Table 4.1

Table 5.1 Table 6.1 Table 6.2

Socio-demographic indicators of Canadian financial diaries participants Intra-city inequality as measured by total marketable wealth and annual disposable income, ranked by Gini coefficient Indicators of financial vulnerability Proportion of payments media used, by value and volume, by income level, in 2017 The inaccessibility of basic banking services to lower-income Canadians

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70 109 126 134

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List of Boxes

Box Box Box Box Box Box Box Box Box Box Box Box

1.1 1.2 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 6.1

Box 6.2

A Case of Financial Vulnerability A Case of Financial Resilience Barriers to Finding Work Women as Primary Providers of Family Support The Insufficiency of Social Welfare Peer-to-Peer Lending and Gifting Living in the Inner City versus Downtown The High Cost of Housing The Challenges of Business Creation in the Inner City The High Cost of Food Insecurity The High Impact of the COVID-19 Pandemic Profile of a Financially Secure Household Earning the Median Income for a Family of Four Living in Toronto Profile of a Financially Vulnerable Household Earning the Poverty-Line Income for a Family of Four Living in Toronto

4 6 61 65 72 74 78 80 82 85 85 130

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CHAPTER 1

Introduction

By world standards, Canada is a very wealthy country. Its productive mixed economy, relying on natural resources, manufacturing, and postindustrial activities, has generated a high national income and average household income. Universal programs such as health care and targeted programs such as social assistance ensure that the poorest Canadians have some supports. But growing inequality, rising debt, and poverty—all compounded by the COVID-19 pandemic—are important factors that have aggravated individual financial vulnerability. We discuss the meaning of financial vulnerability below, but as a starting point it can be understood as the threat of, or worry about, a substantial deterioration in one’s finances. Because of the importance of understanding the context of this vulnerability, this book focuses on the financial vulnerability of people living on low or modest incomes.1 A person who is financially vulnerable sits at the precipice of financial hardship and distress. Whereas central banks and nation-states have long 1 “Low” and “modest” income can be looked at from many different angles. Statistical measures vary depending on the angle needed to inform a specific public policy purpose or debate. For an introduction to the different indicators of low income, see the Government of Canada’s (2016) background document on poverty. We need not be statistically precise for our purposes in this book. Our concern is, simply but importantly, with Canadians who struggle to pay for just the basic necessities—food, shelter, clothing, and health-related expenses.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 J. Buckland and B. Spotton Visano, Financial Vulnerability in Canada, https://doi.org/10.1007/978-3-030-92581-9_1

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been concerned with the macroeconomic stability of the financial system and the threat of financial distress from a downward debt-deflation spiral leading to economic collapse (Spotton Visano, 2006), the financial experience of the consumer has received much less attention until recently. Our concern is with the stability of the financial circumstances of the individual or household, and the threat of a downward spiral of debt leading to significant deprivation and deterioration in physical, mental, and financial health and well-being.

Defining Financial Vulnerability There are different views about financial vulnerability in the literature, but one common feature is that it involves not a condition per se, but a threat or risk of change. And that change of concern is some sort of financial deterioration. The deterioration can happen in both short-term and longterm senses. The short-term condition, often referred to as illiquidity, is a condition in which an individual cannot pay their day-to-day bills. There is not enough money to cover purchases. For a middle-income person, illiquidity results in having to cut some expenses or substitute less expensive options, which may be very emotionally trying but most likely will not prevent them from meeting their basic material needs such as food and housing. For the person living at or near the poverty line, the cutting and substituting required by illiquidity will affect their ability to meet their material needs in the short run. The stress created by the threat of this situation we will call liquidity stress . The longer-term dimension of financial vulnerability, insolvency, is a situation in which a person’s net worth is negative and they are unable to service their debts. For our purposes we use a slightly different, and broader, definition of insolvency, which is a situation in which a person’s lifetime expenditure is greater than their lifetime income.2 Conversely, solvency is a condition in which someone’s lifetime spending is equal to or 2 These definitions of insolvency are related if the debt in question was accumulated for investments to increase the person’s lifetime income. The person with relatively variable income, as compared to one with relatively stable income, will need to do one of three things: vary their spending subject to their income, smooth their spending by pre-saving, or smooth their spending by borrowing. Varying spending is less attractive for many people and very difficult for people living at or near the poverty line. Saving for future needs assumes a period of excess income which may not be possible. Borrowing involves interest costs.

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less than lifetime income. For a middle-income person, insolvency could make it hard to make mortgage payments, possibly forcing them to move to an apartment. For a person living at or near the poverty line, this means protracted insecurity of house, food, and other essentials. In the face of insolvency, this person might lose their apartment and become homeless or nearly homeless. Another term we use for insolvency in this study is financial insecurity. An inability to meet spending now and in the foreseeable future, or to have unpayable debt, means the person is financially insecure. To summarize, a person is financially vulnerable if they are at risk of not meeting current financial commitments (liquidity stress), are financially insecure and incapable of making future financial commitments (insolvent), or both. These threats can affect, in turn, the health and overall well-being of people. Because vulnerability is about possibility and not certainty, the consequences of financial vulnerability depend on various individual, community, and macro-level factors. If these factors move in a way that assists the household, then the household might become less vulnerable. But if the salient factors move against the household, its members become more vulnerable and perhaps experience a financial crisis. A financial crisis is an actual (not potential) experience and worries about a substantial deterioration of one’s finances, including more debt, less savings, lower income, and/or higher essential spending (e.g., because of an urgent medical issue). It follows that the causes of financial vulnerability are changes that reduce net income and/or net assets, which can flow from the macro-level or the individual’s situation. Macroeconomic factors include • a jump in real interest rates (nominal interest rate less the inflation rate), increasing the burden from debt • a jump in inflation, reducing value of unprotected savings • a growth in inequality, particularly affecting the bottom income quintile, creating a greater relative income gap • trends (particularly for people with low incomes) in wages, salaries, unemployment, and social payments. Individual factors that affect financial vulnerability include

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• a rise in household debt without a rise in assets or income earning potential • a decline in savings • a decline in income • a rise in essential expenditures. We recognize that the role of the state, influencing macro factors, and that of the individual, influencing micro-dynamics, are two “bookends” to the financial vulnerability question.3 In between these two endpoints are subnational groupings such as class, race, and gender. Macro-level changes will affect subnational groups in different ways. For instance, a rise in inequality is likely to worsen the income situation for unemployed and low-waged groups, racialized and Indigenous people, and women, as compared with well-paid white people and men. So financial vulnerability is influenced by factors at the individual, group, and national levels. Box 1.1 A Case of Financial Vulnerability Take the case of Mary (not her real name). A single woman in middle age, she demonstrates considerable resilience when it comes to daily financial needs. She is very modest with her spending, she has a casual and parttime job, she receives some government assistance for her rent, and her father helps her with the rest of her rent most months. She demonstrates solid financial literacy, which is reflected in how well she manages her daily finances. She does, however, struggle with employment, having only a casual job that pays minimum wage and gives her one or two shifts per week. Her income is very limited, she does not want to apply for social assistance, and although she would like additional work, she does not really know how to go about it. In particular, she is reluctant to use a computer to update her job application materials and to use internet job search services. If a crisis hit, such as a dramatic drop in her income (e.g., through her father’s passing away, cancellation of rental support) or a sudden major expenditure (e.g., a major increase in her rent, airfare to visit her ailing father), she would have few options. Since her spending is already so tight, a crisis could lead her to using high-cost credit like a payday loan. And since her income is so low, her ability to repay is poor.

3 International factors, e.g., collective action by the G-7 or G-20 on international debt relief, are also important but are not a part of this study.

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This is a scenario that could lead to a vicious cycle of debt (“borrowing from Peter to pay Paul”).

The opposite of financial vulnerability is financial resilience. Salignac et al. (2019, p. 19) emphasize a dynamic situation in their reactive definition of “resilience” as the “process of bouncing back from adverse events.” Financial resilience refers to a person or household that, in the face of a spending or income shock, can respond in such a way as to minimize their financial, psychological, and/or family harm. Financial resilience is not only the ability to withstand a shock to income or spending but also the opportunity to withstand that shock. A highly indebted and high-income family may be at the same risk of experiencing financial distress from a sudden interest rate increase as a highly indebted low-income family, for example. The difference is that the highincome household generally has more backup financing options and is therefore more resilient, less vulnerable to the broader psychological harm or the downward spiral of financial harm.4 The everyday lived experience of financial vulnerability differs significantly between those who have other mainstream financing options and those who face limited highcost options by virtue of their low household income. We orient our study toward those with low and modest incomes for ethical and practical reasons. Ethical, because if these people move into financial crisis, then their basic needs are unmet; and practical, because, as with the US subprime mortgage crisis, if they move into financial crisis, they can shape the rest of the economy. Our primary concern in this book, then, is with individuals and households living with low to middle incomes. Like O’Connor et al. (2019), we understand financial vulnerability as the threat of financial hardship, and financial hardship, in turn, as the inability to maintain a given standard of living. While it is true that “anyone, regardless of wealth or income can be vulnerable” (O’Connor et al., 2019, p. 422), a drop in standard of living for someone who has been living well above the poverty line has very different implications than a similar drop does for someone already subsisting on a low income. And this deprivation impact will be more

4 Thanks to Allison Meserve of Prosper Canada for this insight.

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significant the longer the individual has been living in poverty prior to the negative financial shock (Layte et al., 2001; Whelan et al., 2002). Box 1.2 A Case of Financial Resilience Kira, like Mary, is a single woman who recently moved out on her own. She is in her early 30s and has a full-time and close to minimum-wage job. She is quite careful with her spending and, particularly when she lived with her parents, was able to accumulate significant savings. Like Mary, she can manage her daily finances, but unlike Mary, she has several assets that she could draw on if she was hit by a financial crisis. This includes her education (an undergraduate degree), her work experience, and her family. Her education would provide her the credential that many employers look to for an entry level position. She is skilled with the computer and internet services and seems to have the confidence needed to find a new position. Her family has been very supportive of her and that would also be a critical support if a financial challenge occurred.

Financial Vulnerability: A Multi-dimensional Concept Financial vulnerability finds its expression in a range of dimensions related to psychological states and behaviors, as well as peoples’ educational, life-cycle, social, economic, and legal circumstances. Since the macroeconomic financial crisis of 2008, with its clear link to household finances, bankruptcies, and foreclosures, the literature examining consumer financial hardship has grown considerably.5 This growth has been marked by experimentation with a variety of different concepts, indicators, and metrics representing household financial difficulty. In the objective characterizations of financial vulnerability, financial ratios common to business

5 An advanced search with Google Scholar for articles (i.e., no citations) on “financial vulnerability,” excluding “charitable” “nonprofit” “business” and “markets,” in only the title of the article between 1990 and 2008 returned 44 articles, only nine of which were related to consumer financial vulnerability (rather than threats of currency crises, e.g.). Adding “financial stress” to the title search returned 154 for that same period. From 2009 to the present, the same search parameters returned 225 (“financial vulnerability”) and 1070 (“financial vulnerability” OR “financial stress”) in the title of the articles, the majority of which focus on household finances.

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and public finance are applied to households. Solvency metrics (debt-toincome, debt-to-asset ratios, for example) and liquidity metrics (focused on financial margins related to debt servicing and budget constraints) are widely accepted as metrics of an objective financial situation. In a parallel development, research examining financial stress and anxiety as affect (as an emotional state) focuses on the individual’s subjective experience of feeling financially vulnerable. For the most part, the two lines of exploration have been running in parallel, and it is only recently that there have been attempts to develop more consistent, comprehensive indicators (Leika & Marchettini, 2017; O’Connor et al., 2019; Salignac et al., 2019). In this book, we recognize the importance, for representing financial vulnerability of households with low incomes, of income metrics (low-skilled wage rates, government assistance rates), spending indicators (cost of necessities), and indicators of inequality (e.g., ratio of top to bottom income quintile).

Why be Concerned with Financial Vulnerability? Large-scale consumer financial distress, as unfolded in 2008 in the United States and to a lesser extent in Canada, threatens the stability of the financial system and ultimately the economy. Our concern is, in equal measure, with the abilities of the individual, the circumstances of the household, and the broader landscape of institutions and regulations that shape and define consumer circumstances. We seek to understand the fullest range of options for reducing financial vulnerability and strengthening consumer financial well-being. For understanding the lived experience of those experiencing financially vulnerability and, more importantly, for identifying the appropriate target of policy actions, it is important to understand concepts of inadequate income and savings on the one hand and over-indebtedness and overspending on the other. It is important to understand how these circumstances might be either caused by or mitigated against, or instead, wholly independent of any one individual’s or household’s financial behavior, being instead the product of a wider set of institutional influences. As we argue in this book, institutional influences are critically important, too, and well beyond the control of the individual.

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Nested Influences Our focus on the experience of financial vulnerability of individuals and households is importantly distinct from assigning all actions designed to prevent or protect against financial vulnerability to the individual and household. This is a key distinction, since much of the literature conflates the two, in part, we argue, because of the dominant ideology of individualism. Leading explanations of financial vulnerability inform the chosen actions of policy makers and regulators. In the institutionalist and policy development literatures, researchers explore the ideational and institutional influences on policymaking and policy debates. As human creations, the ideational encompasses “contingent historical constructions such as cultural beliefs and ideologies,” and the institutional is historically constructed as “embedded rules and norms such as existing social policies and electoral systems” (Béland, 2016, p. 737; see also Daigneault & Béland, 2015). Ideology shapes ideas; ideas shape policies; policies shape institutions6 (Béland, 2016; Campbell, 2004). Policy paradigms—as a “set of structured assumptions about existing policy problems and instruments capable of solving them”—and public sentiment—“widely shared perceptions and assumptions … reflected in polling data”—provide the backdrop against which policy debates about programs, which act as road maps to chart a clear and specific course of action, are framed by symbols and concepts that policy actors “use to legitimize policy proposals and sell them to the public” (see Campbell, 2004, p. 94). Where the proximate indicators of financial vulnerability are definitionally inadequate savings and over-indebtedness, or possibly low income and overconsumption, these indicators often define the policy problem in a way that assigns responsibility to the consumer to fix the problem. Policy instruments most often presented as capable of solving these problems are instruments that enable individuals to take action to reduce their consumer debt, reduce consumption, and increase their savings. The federal government’s policy of promoting financial literacy is one such

6 Institutions are “sets of formal and informal rules, monitoring and enforcement mechanisms, and systems of meaning that define the context within which people and organizations interact. They result in durable practices that are legitimated by widely held beliefs” (Campbell, 2004, p. 174).

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example. The dominant ideology underlying many consumer financial policies in Canada as elsewhere is one of individualism, where responsibility for one’s own financial circumstance is understood to be within an individual’s power to create and to change. Consistent with this ideology of individualism, much of the extant research on financial vulnerability for informing policy action focuses on the psychological, behavioral, and educational dimensions of financial vulnerability. We want to understand these opportunities of better enabling individual knowledge and capability, reducing financial vulnerability, and increasing resilience. We believe it is critical, however, that we also understand the limits of these opportunities as existing within a wider set of nested social and institutional influences: individual choices are critically embedded within the institutions, community, and a societal environment. For this study, we draw on a variety of theoretical approaches, including structuration theory (Giddens, 1979; Stones, 2005), institutional economics (North, 1991; Williamson, 1991), and behavioral economics. Structuration theory is rooted in the idea that structure and agency influence social outcomes. Stones, presenting an in-depth review of the model pioneered by Giddens, shows how the model melds together the role of structures and agents: “structure enters into the constitution of the agent, and from here into the practices that this agent produces. Structure is thus a significant medium of the practices of agents” (Stones, 2005, p. 5). Structuration supports our rejection of the idea that human behavior is powerless (giving all the power to structures) and to reject the idea that structures are all-important (and that the human agent is powerless). Both human agency and structures have a role to play in shaping and explaining financial vulnerability. As Stones argues, structures are an outcome in themselves, for instance the institution of a tax system, creating what he calls the duality of agent and structure (Stones, 2005, p. 5). Institutional economics (Carroll & Teece, 1999; North, 1991) is another approach that shapes this book. As opposed to neoliberal orthodoxy, institutional economics rejects the idea that markets arise without intention and without cost. The costs of markets, transactions costs, are real and are central to how institutional economics seeks to explain the creation and duration of certain institutions. North argued that economic history is shaped by the institutions that are created and maintained, including constitutions, laws, and property rights (North, 1991).

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A central focus of this work, and that of Williamson, “has been on institutions as efficient solutions to problems of organization in a competitive framework” (North, 1991, p. 98). The reason this theoretical approach is important is that it helps to explain different market outcomes in different settings. In particular, the institutional economics approach helps to explain how middle- and above-income communities and individuals can experience high-quality financial services, while low-income communities and people can find they face poor-quality ones. The per unit transaction costs that banks incur in providing large-sized credit and investment products are much lower than those generated by small-sized products demanded by people with low incomes. And if a higher-income community has access to a robust set of banking services and the low-income community lacks even adequate banking services, this can evolve over time to become more unequal. Where behavioral finance focuses on the actions of individuals in the face of given constraints and seeks to understand and shape (“nudge”) an individual’s decisions when confronting that external environment (see Mullainathan & Shafir, 2013; Thaler & Sunstein, 2008), the institutional approach emphasizes the reverse—on shaping the external environment to create the conditions under which individuals have full and equitable access to a range of choices over which they can make optimal financial decisions. Where market failure in need of correction to safeguard consumers justified earlier (1970s) efforts to regulate consumer finance, behavioral finance research begins from the premise that there is a potential for inefficient market outcomes resulting from consumers’ biases and cognitive limitations (see Campbell et al., 2010, for example).7 In other words, behavioral finance starts from the premise that it is consumer failure that needs correction to safeguard financial markets. These theories lend themselves to policies that target individual behavior and attitudes for reducing financial vulnerability. This book returns some of our attention 7 “Another set of problems arise because consumers may not behave as time-consistent, rational utility maximizers. They may, for example, have present-biased preferences, in which decisions favor present consumption even though the consumer would display greater patience if enabled to commit to a future consumption plan. Just as importantly, consumers may lack the cognitive capacity to optimize their financial situation, even if presented with all the information that in principle is required to do so” (Campbell et al., 2010, p. 7).

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to market failures and regulatory solutions in a manner that balances the behavioral finance approach and its implications with these structural and institutional approaches. Canadian Financial Diaries Research Complementing the theoretical approaches that underpin this study, we draw on results from the Canadian Financial Diaries project as a source of primary data on the everyday financial experiences of Canadians with low and modest incomes. By asking participants to track their financial activities on a weekly basis, the project provides detailed information on the financial barriers and opportunities that participants face as they try to manage their finances and struggle to get ahead.

Chapter Outline The following chapter, “Theories and Evidence of Financial Vulnerability,” surveys the academic literature related to financial vulnerability, covering theories that are rooted in the assumption of individual agency and those focused on social, institutional, or structural processes to explain financial vulnerability. We begin by examining the life-cycle consumption model, which posits that individuals decide their current consumption based on not just their current income but also their past and future income as well. Next, we identify sources of consumer shortcomings that give rise to the need for financial literacy education and better financial literacy skills to avoid making “bad choices.” Behavioral finances and the psychology of the consumer are another area of the literature, rooted in experimental research that finds that human rationality is bounded in different ways. This body of research has been very influential in recent years, but it can reinforce the attribution of financial difficulties to agent errors and downplay the importance of structures. This gap is addressed by the institutional and structural literature, and we consider the importance of social networks in engendering or preventing financial vulnerability. Penultimately, this chapter examines macroeconomic studies of financial vulnerability in Canada. These studies consider issues of income and asset poverty as important factors in shaping financial vulnerability. Chapter 3, “Building a Financial Vulnerability Model,” draws on results from Phase 1 of the Canadian Financial Diaries research project to

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theorize a model of financial vulnerability reflecting the everyday reality of Canadians with low and modest incomes. We posit a nested view of household finances as affected by the household as well as by various institutions at local, market, and policy levels that are further removed but still exert a powerful influence. Drawing on the nested model, we examine how diary participants viewed the relationship between financial vulnerability and financial well-being, and the connection between financial well-being and overall well-being. A “pathway” model of financial resilience illustrates how individuals can either move from one level of well-being to another or become stuck at one level. In Chapter 4, “Socio-Cultural and Economic Institutions at the Local Level,” we “bump up” the scale from the household to the community and examine the literature that ties community dynamics to household finances. We begin with an examination of the inner city, a phenomenon that exists in Canada but is perhaps not as pronounced as in the United States. Notions of social exclusion and social capital can operate in both negative and positive ways on inner cities. The role of race, class, and gender is also relevant, particularly in the context in household finances. Next, we dig into the rich geographic literature about the changing nature of urban poverty, which shows that, particularly in the largest metropolitan centers, poverty is moving outwards. The chapter then explores poverty dynamics in urban centers, examining welfare support rates and the informal economy that is rooted in modest-income neighborhoods. Access to housing, retail, food, and health care are all limited in the inner city, and these factors interact with household finance. Chapter 5, “The Household as Financial Manager,” compiles a variety of data on indicators, indexes, and correlates of financial vulnerability, including indicators of illiquidity, insolvency, poverty, and inequality. Given the emphasis in the literature on liquidity and solvency, the data are particularly rich here. We note that debt compared with income has risen, but not so with respect to assets. Poverty indicators improved to 2019 but preliminary evidence is that these have deteriorated through the COVID-19 pandemic. A financially vulnerable household is one in which one or more members struggle to make ends meet, have little financial surplus, have little options for credit, miss an important payment, carry a credit card balance, rely on high-cost credit when faced with a financial shock, and are at risk of bankruptcy. The chapter explores correlates with these indicators, including age, family type, and income. Lone parents are consistently a group that suffers more with financial vulnerability. With

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respect to age, people struggling the most with household finances are on average younger than those struggling the least. Chapter 6, “Markets and Financial Institutions,” explores the banking landscape that Canadians with low incomes face. This landscape includes mainstream banks, alternative banks, and fintech institutions. We consider each bank category, identifying its primary products of interest, and then consider its costs, consumer use, and the regulations governing it, thereby exploring the complexity of banking for people with limited options. Two benchmarks, or financial summaries, are presented: one for a middle-income household and one for a low-income household living in Toronto. The chapter finishes by exploring the emerging fintech sector, including services they offer, consumer use of the services, regulation, and competition with the other sectors. Less is known about the connection between fintech and financial vulnerability (as compared with mainstream and alternative banking options). Its online platform is a barrier for some Canadians with low incomes, but its new technologies present the possibility of an important connection. Chapter 7, “Principles and Policy Recommendations,” begins with an examination of why the neoliberal myth that vulnerable people are to blame for their vulnerability must be reconsidered. This myth is deeply rooted in the culture that emanates from the neoliberal economic system, and it is very harmful. We posit the view that instead, individual and household financial vulnerability comes from many sources, including neoliberalism itself. One important outcome of neoliberalism has been an increase in inequality in Canada, and this phenomenon aggravates the vulnerability that people at the bottom end of the income and asset spectrum face. Finally, we recommend a number of policies, at a very general level, to promote equity and reduce vulnerability, including poverty education, targeted income and employment improvements, and improvements to basic banking.

Works Cited Béland, D. (2016). Ideas and institutions in social policy research. Social Policy and Administration, 50(6), 734–750. Campbell, J. L. (2004). Institutional change and globalization. Princeton University Press. Campbell, J. Y., Jackson, H. E., Madrian, B. C., & Tufano, P. (2010, September 1). The regulation of consumer financial products: An introductory essay with

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four case studies (HKS Working Paper No. RWP10–40). https://doi.org/10. 2139/ssrn.1649647 Carroll, G. R., & Teece, D. J. (Eds.). (1999). Firms, markets, and hierarchies: The transaction cost economics perspective. Oxford University Press. Daigneault, P.-M., & Béland, D. (2015). Taking explanation seriously in political science. Political Studies Review, 13(3), 384–392. Giddens, A. (1979). Central problems in social theory: Action, structure, and contradiction in social analysis. University of California Press. Government of Canada. (2016). A backgrounder on poverty in Canada. Retrieved from https://www.canada.ca/content/dam/canada/employmentsocial-development/programs/poverty-reduction/backgrounder/backgroun der-toward-poverty-reduction-EN.pdf Layte, R., Maître, B., Nolan, B., & Whelan, C. T. (2001). Persistent and consistent poverty in the 1994 and 1995 waves of the European Community Household Panel Survey. Review of Income and Wealth, 47 (4), 427–449. Leika, M., & Marchettini, D. (2017). A generalized framework for the assessment of household financial vulnerability (IMF Working Paper No. 17/228). International Monetary Fund. https://www.elibrary.imf.org/doc/IMF001/ 24640-9781484322352/24640-9781484322352/Other_formats/Source_ PDF/24640-9781484326978.pdf?redirect=true Mullainathan, S., & Shafir, E. (2013). Scarcity: Why having too little means so much. Times Books. North, D. C. (1991). Institutions. Journal of Economic Perspectives, 5(1), 97– 112. O’Connor, G. E., Newmeyer, C. E., Wong, N. Y. C., Bayuk, J. B., Cook, L. A., Komarova, Y., Loibl, C., Lin Ong, L., & Warmath, D. (2019). Conceptualizing the multiple dimensions of consumer financial vulnerability. Journal of Business Research, 100, 421–430. Salignac, F., Marjolin, A., Reeve, R., & Muir, K. (2019). Conceptualizing and measuring financial resilience: A multidimensional framework. Social Indicators Research, 145(1), 17–38. Spotton Visano, B. (2006). Financial crises: Socio-economic causes and institutional context. Routledge. Stones, R. (2005). Structuration theory. Macmillan International Higher Education. Thaler, R. H., & Sunstein, C. R. (2008). Nudge: Improving decisions about health, wealth, and happiness. Yale University Press. Whelan, C. T., Layte, R., & Maitre, B. (2002). Multiple deprivation and persistent poverty in the European Union. Journal of European Social Policy, 12(2), 91–105. Williamson, O. E. (1991). Economic institutions: Spontaneous and intentional governance. Journal of Law, Economics, and Organization, 7 , 159–187.

CHAPTER 2

Theories and Evidence of Financial Vulnerability

To understand the theories of financial vulnerability, we differentiate between individual and social contexts as well as the disciplinary perspectives brought to examine a person’s key motivations, influences, and financial options. As we shall see, theories of financial vulnerability variously focus on psychological, behavioral, educational, social, economic, or political-regulatory explanations. The aim of this chapter is to review some of these theories of financial vulnerability and consider evidence for policies informed by them. Many theories of consumer financial stress, vulnerability, fragility, over-indebtedness, and the like are grounded in a canonical life-cycle model explaining borrowing and saving. These understandings of financial vulnerability focus solely or primarily on the individual decision-maker, disconnected from their social, institutional, and structural surroundings. In this literature, the primary characteristic of financial vulnerability is over-indebtedness. Over-indebtedness is perhaps an acute form of financial difficulty, but as we shall see later in this book, it is not the only way people experience a threat to their financial circumstances. A second set of institutional and structural explanations of financial vulnerability adopt the perspective of the individual embedded in either their broader social experience or a wider set of institutional and structural processes, or both. In this literature, over-indebtedness and other experiences of financial vulnerability are a symptom of inequality, the result of a © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 J. Buckland and B. Spotton Visano, Financial Vulnerability in Canada, https://doi.org/10.1007/978-3-030-92581-9_2

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systemic deficiency manifesting as “an inadequate distribution of income, wealth and opportunity and the precariousness that accompanies living in poverty” (Marron, 2013, p. 800).

Consumer-based Explanations of Financial Vulnerability Consumer-based explanations of financial vulnerability hold the individual as the primary decision-making unit responsible for managing their finances. “DIY” (do-it-yourself) consumer finance and increased consumer responsibility are framed as a positive development in the postwar history of consumer finance, defined by “a story of growth—in variety, in access, and in freedom of choice” (Ryan et al., 2011, p. 461). In the economics literature, the textbook life-cycle consumption model (Ando & Modigliani, 1963) describes a representative decision-making individual choosing between consumption today and consumption in the future, financed by current and future expected income. With saving and borrowing options available and all relevant information easily known and processed, the rational—i.e., utility-maximizing—individual consumes, saves, or borrows along an optimal dynamic path from youth to old age. Random shocks, consumer heterogeneity over cognitive abilities and financial literacy skills, psychological characteristics and behaviors, and consumption preferences are explanations that retain the primacy and responsibility of the DIY individual adept (or not) at money management for financing consumption over their lifetime. Whereas the appropriate proportion of debt to income or assets at any point in the expected lifespan of an individual will vary, anticipated life earnings should cover anticipated lifetime expenditures. Borrowing when young and repaying later in life is then assumed to be made possible by accessing a range of credit opportunities. The rational, wellinformed individual may become over-indebted simply because of an adverse unpredictable shock, resulting in lower future income than was rationally anticipated. Such unfortunate events would then leave the individual over-indebted, with more debt than is possible to carry (Hall, 1978). In this explanation, financial vulnerability as over-indebtedness is simply an acknowledgment of uncertainty manifesting as large random shocks that none of us could predict. Relaxing the assumption that financial consumers are all knowing, many current explanations of financial vulnerability start from the premise

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of either limited ability to solve the intertemporal allocation problem (Soman & Cheema, 2002, e.g.) or time-inconsistent behavior. Hyperbolic discounting—the longer the length of the delay, the more a person discounts the importance of the future—is an example of a cognitive limitation that leads to self-defeating current spending behavior (Ainslie & Haslam, 1992). Or if individuals value the prospect of gains disproportionately more than the prospect of losses, this related limitation again explains over-consumption financed by too much debt, as it does in explaining gambling behavior (Kahneman & Tversky, 1979; Tversky & Kahneman, 1992). If such over-indebtedness is due to a limited understanding of the trade-offs between borrowing to consume more than one’s income today at the expense of having less income for consumption tomorrow, then improving financial literacy skills may reduce financial vulnerability. If stronger financial literacy enables better understanding of these trade-offs and therefore better financial decisions, people will borrow more wisely (borrow less or avoid high-cost credit, for example) be more financially secure, more financially resilient, and ultimately less financially vulnerable. Or so the argument goes. The research linking cognitive limitations and low financial literacy skills to over-indebtedness is considerable.1 Lusardi and Tufano (2009), Lusardi et al. (2011), and Ryan et al. (2011), for example, point to cognitive limitations as the core explanation of over-indebtedness. In their studies of the use of high-cost consumer credit, they “estimate that as much as one-third of the charges and fees paid by less knowledgeable

1 Subsequent research expanded our understanding of the importance of financial literacy alone, explicitly considering the complementary skills and personal temperament required to animate basic financial knowledge. The notion of financial capability is one such skill. Rather than simply higher or lower financial literacy skill levels, we now understand that financial literacy in an individual exists across a spectrum (I might have a strong knowledge of budgeting and managing my money but a weak knowledge of investing and how to invest). To render my knowledge useful, I require supporting skills of recordkeeping, for example (I know a lot about budgeting, but to put my knowledge into effect, I need to be able to record and track my income and expenditures in a consistent way). And beyond the basic knowledge and the skill of record keeping, do I have the temperament to act on that knowledge? (Having the knowledge and the skill to budget is necessary but it’s not enough. I also must have the confidence and the self-discipline to act on my knowledge. If I have the knowledge, the skill, and the confidence, then I will be financially capable.).

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individuals can be attributed to ignorance” (Lusardi & Tufano, 2009, p. 1). The research in this area relies heavily on quantitative research methods employing statistical measures of financial literacy skills. To measure financial literacy, the following questions were first added to the University of Michigan’s Health and Retirement Study in 2004 (Campbell et al., 2011, p. 94) and have since been incorporated into several other national and international surveys. These questions have come to define what is measured when we talk about a person’s level of financial literacy. 1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money to grow: • [more than $102, exactly $102, less than $102? Do not know. Refuse to answer.] 2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy: • [more than, exactly the same as, or less than today with the money in this account? Do not know; refuse to answer.] 3. Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.” [true; false; Do not know; refuse to answer.] Financial literacy operationalized by these standard questions sees a host of published research demonstrating significant positive correlation between the number of incorrect answers and a variety of financial vulnerability indicators in the respondent. Responses from seniors with low savings, low-income consumers with high-cost debt, consumers using high-cost credit when lower-cost mainstream credit is available, for example, consistently demonstrate a positive correlation between lower financial literacy skills and greater financial vulnerability. It should follow that if cognitive limitations and low financial literacy skills explain over-indebtedness and other forms of financial vulnerability, then financial education should bring about increased savings, reduced reliance on payday loans, all-around better money management,

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and increased financial resilience. Yet there remains a striking lack of evidence to support such emancipatory implications. Fernandes et al. (2014, p. 1861), for example, conducted a meta-study covering just over 200 prior studies and found that “interventions to improve financial literacy explain only 0.1% of the variance in financial behaviors studied, with weaker effects in low-income samples.” Several concerns with the reliance on low literacy skills as an explanation of financial vulnerability have been raised. One has to do with the presentation and delivery of standard financial literacy material. As the sample of skills-based questions above demonstrates, financial literacy most often presents financial knowledge as exclusively a collection of factbased objects (interest rates) and skills-related exercises (comparing costs, adhering to a budget, for example). This exclusive focus obscures the strong elements of subjectivity (choice and weight of factors in creditscoring algorithms, for example) and cultural dependencies (over attitudes to debt and individual versus collective savings, for example) that shape the financial landscape. From the perspective of critical pedagogy, Spotton Visano and Ek-Udofia (2017) challenge the premise of consumers as deficient in fact-based knowledge. “The premise that education’s purpose is to remedy any ‘deficit’ of an already economically marginalised learner is, alone, problematic; in financial literacy education, such a premise risks socialising the marginalised learner into an acceptance of the very power structures that created their economic marginalisation in the first place” (p. 763). Another concern arises out of what is essentially a measurement error. Standard measures of financial literacy assume a level of economic development and household circumstance, seeing financial literacy as a one-size-fits-all solution to financial education. Adopting a situationally informed perspective, Buckland (2010) challenges the appropriateness of the metrics employed and the conclusions they appear to support. Testing low-income earners about their knowledge of the investment benefits of stocks and mutual funds may be misguided. Financial education materials that teach people how to save and invest when they are receiving income supports from programs that penalize savings will only discourage learning. When situationally appropriate tests of financial literacy are used, the results suggest that significantly higher levels of financial literacy exist (Buckland, 2010), thus casting doubt on the causality implied by explanations of financial vulnerability that assume cognitive limitations.

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Reaching a similar conclusion through psychology research, Mullainathan and Shafir (2013, p. 72) report that evidence of rational decision-making, as in applying the skill of assessing trade-offs, was more—not less—prevalent among low-income earners. Those with low incomes “reported trade off thinking almost twice as often as the better off (75% vs. 40%).” Indeed, they are “expert in the value of a dollar” (p. 94). It is not that people with low incomes cannot budget, they argue; rather, it is that the greater consequences of an error place undue pressure on the income-constrained decision-maker. Increased anxiety, in turn, makes it harder to function. Attentional or cognitive “tunneling” occurs when an individual becomes hyper-focused on a task to the exclusion of other information. “With little slack, we have less room to fail. With compromised bandwidth, we are more likely to fail” (p. 83). The consequences for financial vulnerability are clear: The reason the poor borrow is poverty itself. No need to resort to myopia or to financial ineptitude for an explanation. Predatory lenders may certainly facilitate this type of borrowing, but they are not the source. The powerful impulse to borrow, the demand for high interest and potentially spiralling borrowing, the kind that creates a slippery slope and looks so ill advised, is a direct consequence of tunneling. Scarcity leads us to borrow and pushes us deeper into scarcity. (Mullainathan & Shafir, 2013, p. 115)

A separate set of limitations around financial literacy arises out of the issue of equal access. For example, Canada’s tax code is 3,227 pages long (Bunn, 2019) and so challenges even the most expert tax accountant, but higher-income Canadians can afford to pay these professionals to navigate their tax returns for them. Not true for Canadians with more modest incomes, who rely on services provided by an under-resourced voluntary sector (Task Force on Financial Literacy, 2010, p. 23).2 As another example, Willis (2009, p. 422) cites from a US Federal Reserve Board’s Consumer Handbook to illustrate how in shopping for a home mortgage, the demands of DIY finance are prodigious and complex: “to compare two ARMs [adjustable-rate mortgages] with each other or to compare 2 In response to the recommendation of the Task Force, though, the federal government did “invest in the capacity of [community service agencies, charitable groups, and umbrella organizations] to offer financial information, learning and guidance to Canadians” (Task Force on Financial Literacy, 2010, p. 52). The result has been quality, publicly available, and financial literacy information.

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an ARM with a fixed-rate mortgage, you need to know about indexes, margins, discounts, caps on rates and payments, negative amortization, payment options, and recasting (recalculating) your loan.” From an extreme neoliberalist perspective, if consumers are limited in their financial capability and are naïvely paying the price in terms of higher financial vulnerabilities, then pure competition will bankrupt them; competition may be harsh, but it is the price we must pay for efficiency. A more restrained position is expressed by those who similarly yield to the logic of the market but with moderated consequences. State intervention for remedying low financial literacy skills is then justified because of the threat these consumer limitations pose to market efficiencies. The levels and consequences of “a pervasive lack of basic financial literacy”—as an important example of the cognitive limitations of financial consumers— “has highlighted the potential for inefficient market outcomes that result from consumers’ biases and cognitive limitations” (Campbell et al., 2011, p. 93). Private-market incentives to educate consumers are inadequate because the continued use of higher-cost credit is to the firm’s advantage. “Nor is it profitable for firms to educate naïve consumers, because educated consumers become sophisticated and then demand fewer highcost financial services” (Campbell et al., 2011, p. 95). In this view, government support of financial education is warranted. Behavior and Consumer Financial Vulnerability In a separate strand of the literature, people are again portrayed as being in need of education, but for a variety of reasons, educating them to behave more rationally will not work. In behavioral finance literature, the central tenet “is that individual economic action is guided less by rationality than by psychological attributes intrinsic to the individual; therefore, providing information and education will not have significant impacts upon how most individuals make choices within markets” (Garcia, 2013; Marron, 2013, p. 801). The large and growing literature in behavioral finance seeks to examine how individuals and households behave under what incentives, motivations, and constraints. “Nudges” are sought to encourage financial choices and behaviors thought to reduce financial vulnerability. To the extent the that financial circumstance of an individual is within an individual’s power to influence, the more we understand about what influences

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behaviors, the better chance we have of suggesting ways of “nudging” that behavior away from financial vulnerability and toward financial resilience. For example, Jones et al. (2015) find that billing disclosure requirements are effective in stimulating the timely payment of credit card debt (see also Roll & Moulton, 2019). For those in favor of the benefits of “nudges,” fintech (financial technology) options hold promise: New research on consumer decision making—such as the work on automatic enrollment—promises to dramatically change saving and spending behavior through better financial products and regulations. Conversely, the failure to carefully understand consumer financial decisions can lead to the problems of insufficient retirement savings, excess leverage, and poorly designed mortgage products. (Tufano, 2009, p. 241)

Psychology and Consumer Financial Vulnerability There is a considerable literature on the psychological attributes that define and explain financial stress or anxiety as the experience of emotion (e.g., Brown & Taylor, 2014; Tang & Baker, 2016). Our concern is only with the emotional experience of financial stress that may influence consumer financial options, in the way tunneling during periods of scarcity may influence financial vulnerability (Mullainathan & Shafir, 2013).3 Financial anxiety can inhibit an individual’s ability to act when needed (Shapiro & Burchell, 2012) and can, consequently, influence objective financial vulnerability and resilience. Optimism as a psychological disposition influences one’s sense of financial well-being which can, in turn, influence one’s choice of defensive financial behaviors (e.g., savings) or debt-financing choices (see, e.g., Choi & Laschever, 2018; Gerhard et al., 2018; Nicolini & Cude, 2019; Xu et al., 2015). One of the most significant influences of an individual’s psychological state on financial vulnerability is in their attitude toward risk and uncertainty. Risk and uncertainty, as well as limited memory and experience with negative events, affect a person’s ability to predict the future and thus compromises the integrity of assessments of adequate levels 3 We omit consideration of the hard-wired psychological characteristics that explain household finances per se (e.g., Brown & Taylor, 2014).

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of debt. An overly optimistic assessment of future income, for example, may encourage debt. When reality later proves to be less fortunate, the individual is stuck with a debt they cannot afford (Betti et al., 2007). This literature sheds important light on the relationship between individual psychological predispositions and financial behaviors that influence objective measures of financial vulnerability. Yet as Brzozowski and Spotton Visano (2020) note, although the number of studies assessing various links is extensive, most of this research relies on idiosyncratic surveys of small groups of study participants. To date there are no national studies that can document these same detailed links between psychological stress and emotion in a manner that holds any external validity.4 Further complicating the generality of this evidence is the challenge of construct validity and reliability. As Prawitz et al. (2006, p. 34) noted more than a decade ago, “there has been little agreement as to the best way to measure [subjective assessment of the financial situation], or even which construct was being measured.” Still today there remains no agreed-upon best measure of financial vulnerability (Brzozowski & Spotton Visano, 2020; O’Connor, et al., 2019), and researchers continue to rely on a wide variety of measures, as we shall see in Chapter 5.

Institutional and Structural Explanations of Financial Vulnerability Critics of the consumer-based theories of financial vulnerability argue that the problem with this focus on the autonomous, individual, prudent, and responsible financial consumer is that it “overly simplifies the experience of poverty as well as the solution, denigrates the agency of individuals under conditions of pronounced inequality and imposes normative middle-class categories upon the world” (Marron, 2013, p. 804).5 And 4 In this study, we examine data from a nationally representative survey (the Canadian General Social Survey) but are unable to test the detailed relationships between the subjective and objective indicators of financial vulnerability suggested by the psychology literature, because of survey limitations. 5 While not addressing financial vulnerability per se, the well-being literature begins to expand the purpose of people’s economic pursuits beyond materialism and the markets. Indigenous notions of people as embedded in community form the basis of Mulholland and Brascoupé’s (2019) treatment of financial inclusion, security, and capability. Dalziel et al. (2018) propose a well-being economics framework that builds on the capabilities

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we know there are some sources of potential financial harm that are inescapable for even the most highly skilled of financial consumers. Social-scientific explanations that locate the individual in a group dynamic include ones that emphasize socialization and other network effects—as either a source of resilience or a force of vulnerability. Much of this literature permits considerations of issues related to class, gender, and race through examinations of “demand-side” structural forces of growing income and wealth inequality affecting the financial opportunities available to individuals and households with low and modest incomes. Structural changes in the labor market may lead to increased income insecurity, as Beach (2016) reviews. An increase in non-standard forms of employment, particularly in the “gig” economy, and the resulting increase in earnings insecurity may underlie a financial vulnerability that cannot be explained by the action of any one single agent. Institutional barriers layered on top of these structural changes make it even more difficult to cope because the barriers obstruct access to safer, cheaper financial services and products. Social Networks and Consumer Financial Vulnerability According to some theories, social networks may offer a means of building financial resilience through social capital, while in other theories, networks act as structural forces that “push households to acquire consumer debts in order to protect their lifestyles from market volatilities and wage stagnation” González (2015, p. 782). Starting from the premise that consumers are dependent on their social situation, culture, and the behavior of others, we see the social influence on consumers’ decisions in theories that draw on the notion of “social capital,” or “networks together with shared norms, values and understandings that facilitate co-operation within or among groups” (OECD, 2001, p. 41). Dominating the financial counseling and planning literature is the “family financial socialization” model that places the individual explicitly in a family-social context, emphasizing the influences of family interaction and relationships through socialization on individual financial behaviors (Danes & Yang, 2014). “Applications of the concept [of social capital] in the sociological literature emphasize its role in social control, in family approach of Sen (2005), embedding people in a fabric that explicitly recognizes families, cultural capital, social capital, civil society, and nature (environment).

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support, and in benefits mediated by extrafamilial networks” (Portes, 1998, p. 1). Pericoli et al. (2015) find similarly that civic participation, specifically group participation, and identification with neighborhood groups and friends positively affect consumption over the longer term (see Morduch, 1995). Leung et al. (2011) examine the ways in which social capital builds financial resilience. While some consider social networks to be an asset, these same networks may have a detrimental effect on an individual’s financial vulnerability. In a US study, Christen and Morgan argue that conspicuous consumption—a Veblen (1899) effect—may operate to increase consumer financial vulnerability: Income inequality affects all components of total household debt, but the impact is strongest on non-revolving debt (installment loans), which is used to finance the purchase of consumer durables … Rising income inequality has forced households with smaller income gains to use debt to keep up their consumption level relative to households with larger income gains. (Christen & Morgan, 2005, p. 145)

Similarly, unequal distribution of income, as argued in Kim et al. (2014), drives too much borrowing by those with a lower income trying to emulate those with more consumption afforded by higher incomes.6 The “Economy” and Consumer Financial Vulnerability Yet another set of structural explanations of household financial vulnerability emphasize the importance of either income or wealth inequality in influencing the decision-making power and financial choices of lowincome consumers. Linked closely to heterodox theories of economywide financial crises that rely heavily on credit-based explanations, these theories consider how a set of larger macroeconomic and political forces can shape the credit available to consumers as well as their borrowing needs. Morduch and Schneider (2017), for example, found that earnings volatility was highest among the poorest participants in their American study and link this volatility to the decline in manufacturing and rise 6 Closely linked to the notion of relative income effects (Duesenberry, 1949), these socially informed explanations of consumer financial vulnerability form the basis of some macroeconomic explanations for how income inequality may have contributed to the recent financial crisis (see Perugini et al., 2016, for a brief review).

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of the gig economy. They noted that spending was nearly as variable as income across their sample, with an average of 2.2 spending spikes and 2.6 spending dips per year (see Morduch & Siwicki, 2017, as well). The possibility that poverty causes financial vulnerability sees support in several studies from a variety of disciplines. In psychology, Mullainathan and Shafir (2013, p. 155), for example, state that “poverty—the scarcity mindset—causes failure.” In political studies, Rajan (2010) suggests that rising inequality in the USA pressured governments of all political persuasions to enact policies aimed at improving the situation of those low- and middle-income voters being left behind … Successive governments chose to placate those voters by enacting policies that would expand their access to credit, such as deregulation of credit markets and encouraging of stateowned mortgage agencies to expand lending to low-income households.” (as interpreted by Perugini et al., 2016, p. 231)

While over-indebtedness of an individual remains the principal indicator of financial vulnerability in this literature, the causes lie in poverty, income inequalities, and government policies rather than the cognitive limitations of individuals. Evidence of Inequality in Canada There is a growing literature on the nature and trends of poverty in Canada (Green et al., 2016; Notten & Kaplan, 2021; Rothwell & Robson, 2018) and in the rising income inequality observed over the last three decades (Green et al., 2016). Rothwell and Robson (2018) find that asset poverty—measured as households with less than three months of liquid assets—is around 50% in Canada. This is well above various indicators of income poverty, which put it at about 11% in 2018. Digging deeper into the contours of this poverty exposes its racialized and gendered dimensions. By one measure of poverty, nearly one-quarter (24%) of Indigenous people living in urban areas in the provinces were in poverty. By comparison, 13% of the non-Indigenous population in these areas were in poverty (Statistics Canada, 2020b).7 While the census from 7 Currently, the MBM (Market Basket Measure) is not applicable in the Territories or on reserves. According to Statistics Canada (2020b, n.2), the MBM is currently under review, and an updated “re-based” version will be released in the near future. As indicated in the report on the second comprehensive review of the MBM, Statistics Canada is working with the Northwest Territories, Yukon, and Nunavut to develop territory-specific MBM

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which these data were obtained does not survey the Territories or Indigenous peoples on reserve, an older survey (the 2011 National Household Survey) shows that child poverty rates for status First Nations children living on reserve was a staggering 60% in 2010 (Macdonald & Wilson, 2016). By the low-income measure (after tax), nearly 21% of racialized people in Canada were considered low income in 2016, compared to just over 12% of non-racialized people (Statistics Canada, 2019). And while the disparity in 2015 between the proportion of women and men in low income (1 percentage point) had shrunk to “the smallest observed since … 1976,” we still see 16.3% of elderly women in the low-income category, compared with 11.9% of men (Fox & Moyser, 2018). Increasing awareness of the multiple dimensions of poverty has resulted in a more robust picture of poverty as a matrix of indicators (Alkire & Foster, 2011a, 2011b; Alkire et al., 2015). According to Dhongde and Haveman (2017), for example, a multidimensional deprivation index that takes explicit account of other dimensions of poverty (including education level, housing costs, and access to health insurance) reveals a greater proportion of the US population to be multidimensionally deprived than is suggested by traditional measures of poverty. Statistics Canada now provides multiple indicators of poverty on its Dimensions of Poverty Hub. Low-income indicators are supplemented there by data on access to health care, income inequality, food insecurity, literacy, and minimum wage or low-paid work (see Statistics Canada, 2020a). The multiple indicators of poverty have not yet been incorporated into the measurement of Canada’s official poverty line as defined by the minimum basket of needed accommodation, food, transportation, clothing, and “other.” Current efforts at Statistics Canada may soon remedy some of these shortcomings (see Heisz, 2019). Institutional Barriers Heckman and Hanna (2015) examined US household financial behavior from an institutional perspective and found that indicators of institutional access, not financial literacy, helped to better predict savings behavior. Limited access to safe, secure, and affordable basic banking services is thresholds for these regions. The Government of Canada has also committed to working with First Nations, Métis, and Inuit to identify and co-develop indicators of poverty and well-being.

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a potential problem for the financially vulnerable, since restricted access may itself force financial choices that increase the risk of financial harm. Branch closures in low-income neighborhoods (Buckland & Martin, 2005), limited access to low-cost credit, and general exclusion from mainstream banking (Simpson & Buckland, 2009) are examples of a host of institutional access barriers (Spotton Visano, 2018). We consider some of these in more detail in Chapter 6.

Financial Policies and Regulations and Consumer Financial Vulnerability The ideological underpinnings of these various theories of financial vulnerability shape policy intervention. The relevant ideologies informing social-scientific explanations of financial vulnerability can be represented on a linear spectrum, with methodological individualism providing the foundation of consumer-based theories on the one end,8 and group dynamic in a systems theoretic framework grounding network and institutional explanations at the other. The dominant ideology of individualism has heavily influenced recent policy efforts. Where now it is consumer limitations that government policy needs to address to protect the efficiencies of financial markets, the opposite was once the norm. Consumers in need of protection from the abuses of the market underpinned early efforts to regulate the consumer finance market. In 1939, Canada introduced the Small Loans Act designed to protect consumers from financial exploitation. The legislation imposed a price ceiling on lending and operational restrictions on creditors through licensing requirements and federal oversight. With the widening appeal of rational choice theory in mainstream economics and the other social sciences, views of consumers and markets shifted, and with that the view of government’s ability to protect consumers relative to markets. In 1981, Canada added a usury limit to the Criminal Code (an effective annual percentage rate of 60%) to prevent loan sharking and then repealed the Small Loans Act because “Parliament believed market forces would more effectively protect borrowers” (Antle, 1994, p. 2).

8 For a more nuanced interpretation of methodological individualism in contrast with a systems theoretic perspective, see Heath (2020).

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With the entry of payday and other high-cost lenders of smalldenomination credit into Canada in the early 1990s, this shift in favor of market efficiencies became cemented. In 2006, Canada amended the Criminal Code to exempt payday lenders (who were charging effective interest rates well in excess of the 60% Criminal Code limit). The justification was that these loans are demanded, the cost of supplying them is high and can only be covered by rates in excess of 60%, and their regulation is located in the provinces and territories. Since then, provincial regulations have, except in Quebec, allowed payday lenders to charge borrowing rates that reflect the industry’s self-reported costs. As Robinson (2018) notes, however, most of these firms are privately held and thus not subject to any public scrutiny, including any public scrutiny of their self-reported costs of operation. Inching further along the ideological spectrum, the last 20 years have seen a shift where it is not just that we should let free markets work unfettered but that the role of government should now be to actively safeguard against market inefficiencies arising out of consumer deficiencies. Consumer financial education emerged in 2009 as a policy of the federal government with the government’s creation of a Task Force on Financial Literacy. Its raison d’être is clear: “The Task Force believes strongly that financial literacy is critical to the prosperity of Canadians and the nation. Increasing the knowledge, skills and confidence of Canadians to make responsible financial decisions will help them meet their personal goals, enhance their quality of life and make Canada more competitive” (Financial Literacy Canada, 2009). From a meta-perspective, the fact that so much of the financial vulnerability research focuses on the individual’s financial literacy skills and behavioral patterns as the dominant explanations of financial vulnerability risks advancing the perception that people who have only a modest income, no savings, or take out a payday loan are, if not architects of their own misfortune, at least responsible for reversing it. To fully address financial vulnerability, a greater emphasis on the structural forces and institutional barriers that contribute to financial vulnerability may be needed to balance DIY consumer theories and the policies they support. The tension inherent in abstract theories and their significant policy implications demands a better understanding of the actual real-time experience of financial vulnerability among those most at risk of harm. In the next chapter, Canadian financial diaries research sheds light on the financial vulnerability phenomenon and exposes the critical role played by

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social structures and institutional environments in explaining the financial vulnerability of Canadians.

Works Cited Ainslie, G., & Haslam, N. (1992). Hyperbolic discounting. In G. Loewenstein & J. Elster (Eds.), Choice over time (pp. 57–92). Russell Sage Foundation. Alkire, S., & Foster, J. (2011a). Counting and multidimensional poverty measurement. Journal of Public Economics, 95(7–8), 476–487. Alkire, S., & Foster, J. (2011b). Understandings and misunderstandings of multidimensional poverty measurement. Journal of Economic Inequality, 9, 289–314. Alkire, S., Foster, J., Seth, S., Santos, M., Roche, J., & Ballon, P. (2015). Multidimensional poverty measurement and analysis. Oxford University Press. Ando, A., & Modigliani, F. (1963). The life-cycle hypothesis of saving: Aggregate implications and tests. American Economic Review, 53(1), 55–84. Antle, S. (1994). A practical guide to section 347 of the criminal code—Criminal rates of interest. Canadian Business Law Journal, 23, 323. Reprinted by and retrieved from https://www.blg.com/-/media/Legacy-News-And-Public ations/Documents/Antle_Practical_Guide_to_section_347.pdf Beach, C. (2016). Changing income inequality: A distributional paradigm for Canada. Canadian Journal of Economics, 49(4), 1229–1292. Betti, G., Dourmashkin, N., Rossi, M., & Yin, Y. (2007). Consumer overindebtedness in the EU: Measurement and characteristics. Journal of Economic Studies, 34(2), 136–156. Brown, S., & Taylor, K. (2014). Household finances and the “Big Five” personality traits. Journal of Economic Psychology, 45, 197–212. Brzozowski, M., & Spotton Visano, B. (2020). “Havin’ money’s not everything, not havin’ it is”: The importance of financial satisfaction for life satisfaction in financially stressed households. Journal of Happiness Studies, 21(2), 573–591. Buckland, J. (2010). Are low-income Canadians financially literate? Placing financial literacy in the context of personal and structural constraints. Adult Education Quarterly, 60(4), 357–376. Buckland, J., & Martin, T. (2005). Fringe banking in Winnipeg’s North end. Canadian Centre for Policy Alternatives. Bunn, B. (2019, April 22). Canada’s income tax act is 3,227 pages. Do we really need all these rules? Globe and Mail. https://www.theglobeandmail. com/life/first-person/article-canadas-income-tax-act-is-3227-pages-do-wereally-need-all-these/ Campbell, J. Y., Jackson, H. E., Madrian, B. C., & Tufano, P. (2011). Consumer financial protection. Journal of Economic Perspectives, 25(1), 91–114.

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Choi, H. S., & Laschever, R. A. (2018). The credit card debt puzzle and noncognitive ability. Review of Finance, 22(6), 2109–2137. Christen, M., & Morgan, R. M. (2005). Keeping up with the Joneses: Analyzing the effect of income inequality on consumer borrowing. Quantitative Marketing and Economics, 3(2), 145–173. Dalziel, P., Saunders, C., & Saunders, J. (2018). Wellbeing economics: The capabilities approach to prosperity. Palgrave Macmillan. Danes, S. M., & Yang, Y. (2014). Assessment of the use of theories within the Journal of Financial Counseling and Planning and the contribution of the family financial socialization conceptual model. Journal of Financial Counseling and Planning, 25(1), 53–68. Dhongde, S., & Haveman, R. (2017). Multi-dimensional deprivation in the US. Social Indicators Research, 133(2), 477–500. Duesenberry, J. (1949). Income, saving and the theory of consumer behavior. Harvard University Press. Fernandes, D., Lynch, J. G., Jr., & Netemeyer, R. G. (2014). Financial literacy, financial education, and downstream financial behaviors. Management Science, 60(8), 1861–1883. Financial Literacy Canada. (2009). Welcome to the task force on financial literacy. http://financialliteracyincanada.com/index.html Fox, D., & Moyser , M. (2018). Women in Canada: A gender-based statistical report. The economic well-being of women in Canada. Statistics Canada. https://www150.statcan.gc.ca/n1/pub/89-503-x/2015001/ article/54930-eng.htm Garcia, M. J. R. (2013). Financial education and behavioral finance: New insights into the role of information in financial decisions. Journal of Economic Surveys, 27 (2), 297–315. Gerhard, P., Gladstone, J. J., & Hoffmann, A. O. (2018). Psychological characteristics and household savings behavior: The importance of accounting for latent heterogeneity. Journal of Economic Behavior and Organization, 148, 66–82. González, F. (2015). Where are the consumers? “Real households” and the financialization of consumption. Cultural Studies, 29(5–6), 781–806. Green, D. A., Riddell, W. C., & St-Hilaire, F. (Eds.). (2016). Income inequality: The Canadian story. The art of the state (Vol. 5). Institute for Research on Public Policy. https://irpp.org/research/income-inequality-the-canadianstory/ Hall, R. E. (1978). Stochastic implications of the life cycle-permanent income hypothesis: Theory and evidence. Journal of Political Economy, 86(6), 971– 987.

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Heath, J. (2020). Methodological individualism. In E. N. Zalta (Ed.), The Stanford encyclopedia of philosophy (Summer 2020 ed.). Stanford University. https://plato.stanford.edu/entries/methodological-individualism/ Heckman, S. J., & Hanna, S. D. (2015). Individual and institutional factors related to low-income household saving behavior. Journal of Financial Counseling and Planning, 26(2), 187–199. Heisz, A. (2019). An update on the Market Basket measure comprehensive review. Statistics Canada/Statistique Canada. https://www150.statcan.gc.ca/ n1/pub/75f0002m/75f0002m2019009-eng.htm Jones, L. E., Loibl, C., & Tennyson, S. (2015). Effects of informational nudges on consumer debt repayment behaviors. Journal of Economic Psychology, 51, 16–33. Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47 , 313–327. Kim, Y. K., Setterfield, M., & Mei, Y. (2014). A theory of aggregate consumption. European Journal of Economics and Economic Policies: Intervention, 11(1), 31–49. Leung, A., Kier, C., Fung, T., Fung, L., & Sproule, R. (2011). Searching for happiness: The importance of social capital. Journal of Happiness Studies, 12(3), 443–462. Lusardi, A., Schneider, D. J., & Tufano, P. (2011). Financially fragile households: Evidence and implications (NBER Working Paper Series No. 17072). National Bureau of Economic Research.. https://www.nber.org/system/ files/working_papers/w17072/w17072.pdf Lusardi, A., & Tufano, P. (2009). Debt literacy, financial experiences, and overindebtedness (No. w14808). National Bureau of Economic Research. Macdonald, D., & Wilson, D. (2016). Shameful neglect: Indigenous child poverty in Canada. Canadian Centre for Policy Alternatives. https://www.policy alternatives.ca/sites/default/files/uploads/publications/National%20Office/ 2016/05/Indigenous_Child%20_Poverty.pdf Marron, D. (2013). Governing poverty in a neoliberal age: New labour and the case of financial exclusion. New Political Economy, 18(6), 785–810. Morduch, J. (1995). Income smoothing and consumption smoothing. Journal of Economic Perspectives, 9(3), 103–114. Morduch, J., & Schneider, R. (2017). The financial diaries. Princeton University Press. Morduch, J., & Siwicki, J. (2017). In and out of poverty: Episodic poverty and income volatility in the US financial diaries. Social Service Review, 91(3), 390–421. Mullainathan, S., & Shafir, E. (2013). Scarcity: Why having too little means so much. Time Books.

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Mulholland, E., & Brascoupé, S. (2019). The shared path: First nations financial wellness. AFOA Canada and Prosper Canada. https://prospercanada.org/ getattachment/1d5fecb2-c778-4780-8a59-34d827cf86c4/The-Shared-PathFirst-Nations-report-on-financial.aspx Nicolini, G., & Cude, B. J. (2019). The influence of financial well-being on pawnshop use. Journal of Consumer Affairs, 53(4), 1674–1692. Notten, G., & Kaplan, J. (2021). Material deprivation: Measuring poverty by counting necessities households cannot afford. Canadian Public Policy, 47 (1), 1–17. O’Connor, G. E., Newmeyer, C. E., Wong, N. Y. C., Bayuk, J. B., Cook, L. A., Komarova, Y., Loibl, C., Lin Ong, L., & Warmath, D. (2019). Conceptualizing the multiple dimensions of consumer financial vulnerability. Journal of Business Research, 100, 421–430. OECD. (2001). The well-being of nations: The role of human and social capital. OECD. https://stats.oecd.org/glossary/detail.asp?ID=3560 Pericoli, F. M., Pierucci, E., & Ventura, L. (2015). The impact of social capital on consumption insurance and income volatility in the UK: Evidence from the British Household Panel Survey. Review of Economics of the Household, 13(2), 269–295. Perugini, C., Hölscher, J., & Collie, S. (2016). Inequality, credit and financial crises. Cambridge Journal of Economics, 40(1), 227–257. Portes, A. (1998). Social capital: Its origins and applications in modern sociology. Annual Review of Sociology, 24(1), 1–24. Prawitz, A. D., Garman, E. T., Sorhaindo, B., O’Neill, B., Kim, J., & Drentea, P. (2006). InCharge financial distress/financial well-being scale: Development, administration, and score interpretation. Journal of Financial Counseling and Planning, 17 (1), 34–50. Rajan, R. G. (2010). Fault lines. Princeton University Press. Robinson, C. (2018). A business analysis of the payday loan industry. In J. Buckland, C. Robinson, & B. Spotton Visano (Eds.), Payday lending in Canada in a global context (Chap. 4). Springer. Roll, S. P., & Moulton, S. (2019). The impact of automated reminders on credit outcomes: Results from an experimental pilot program. Journal of Consumer Affairs, 53(4), 1693–1724. Rothwell, D., & Robson, J. (2018). The prevalence and composition of asset poverty in Canada: 1999, 2005, and 2012. International Journal of Social Welfare, 27 (1), 17–27. Ryan, A., Trumbull, G., & Tufano, P. (2011). A brief postwar history of US consumer finance. Business History Review, 85(3), 461–498. Sen, A. (2005). Human rights and capabilities. Journal of Human Development, 6(2), 151–166.

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Shapiro, G. K., & Burchell, B. J. (2012, May). Measuring financial anxiety. Journal of Neuroscience, Psychology, and Economics, 5(2), 92−103. Simpson, W., & Buckland, J. (2009). Examining evidence of financial and credit exclusion in Canada from 1999 to 2005. Journal of Socio-Economics, 38(6), 966–976. Soman, D., & Cheema, A. (2002). The effect of credit on spending decisions: The role of the credit limit and credibility. Marketing Science, 21(1), 32–53. Spotton Visano, B. (2018). Mainstream financial institution alternatives to payday loans. In J. Buckland, C. Robinson & B. Spotton Visano (Eds.). Payday lending in Canada in a global context (Chap. 6). Springer. Spotton Visano, B., & Ek-Udofia, I. (2017). Inclusive financial literacy education for inspiring a critical financial consciousness: An experiment in partnership with marginalised youth. International Journal of Inclusive Education, 21(7), 763–774. Statistics Canada. (2019) Data tables, 2016 Census. https://www12.statcan.gc. ca/census-recensement/2016/geo/geosearch-georecherche/ips/index.cfm? q=98-400-X2016211&l=en&g=2016A000011124 Statistics Canada. (2020a). Dimensions of poverty hub. https://www.statcan.gc. ca/eng/topics-start/poverty Statistics Canada. (2020b). Indigenous people in urban areas: Vulnerabilities to the socioeconomic impacts of COVID-19. https://www150.statcan.gc.ca/n1/ pub/45-28-0001/2020001/article/00023-eng.htm Tang, N., & Baker, A. (2016). Self-esteem, financial knowledge and financial behavior. Journal of Economic Psychology, 54, 164–176. Task Force on Financial Literacy. (2010). Canadians and their money: Building a brighter future. Ottawa. https://www.canada.ca/content/dam/fcac-acfc/doc uments/programs/financial-literacy/canadians-and-their-money.pdf Tufano, P. (2009) Consumer finance. Annual Review of Financial Economics, 1, 227–247. https://doi.org/10.1146/annurev.financial.050808.114457 Tversky, A., & Kahneman, D. (1992). Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty, 5(4), 297– 323. Veblen, T. (1899). The theory of the leisure class. Modern Library. Willis, L. E. (2009). Evidence and ideology in assessing the effectiveness of financial literacy education. San Diego Law Review, 46, 415–458. https://digital. sandiego.edu/cgi/viewcontent.cgi?article=2715&context=sdlr Xu, Y., Beller, A. H., Roberts, B. W., & Brown, J. R. (2015). Personality and young adult financial distress. Journal of Economic Psychology, 51, 90–100.

CHAPTER 3

Building a Financial Vulnerability Model

This chapter presents a framework for understanding financial vulnerability in the context of Canadians with low and modest incomes. This framework was built through an inductive process, drawing on the work and data flowing from the Canadian Financial Diaries research project. The framework recognizes the diversity of financial vulnerabilities and resiliencies among asset-constrained Canadians and notes the careful ways in which people manage their limited income, even as they face obstacles that make it hard to build their human and financial assets. After noting the diversity of capabilities among those with low and modest incomes, we consider the age-old question of who or what is responsible for financial vulnerability: the agent or the structure. Using a nested model, we show that this dichotomy is not a helpful way to understand financial vulnerability. Instead, we argue that agent and structure interact in complex ways that enable or disable financial capability. The chapter goes on to examine the relationship between financial well-being and vulnerability and considers how these are influenced by life events, employment, and life activities. This is followed by an examination of the connection between financial and overall well-being. The final section of the chapter seeks to analyze the financial resilience and vulnerabilities of the diary participants using the metaphor of the financial resilience pathway.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 J. Buckland and B. Spotton Visano, Financial Vulnerability in Canada, https://doi.org/10.1007/978-3-030-92581-9_3

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The Canadian Financial Diaries Project The Canadian Financial Diaries is a multiyear research project that seeks to capture the finances and financial experiences of Canadian earners with low and modest incomes.1 In recent years, income and asset inequality has risen in Canada, leading to increasing numbers of people who are economically vulnerable. Good policymaking about socio-economic problems such as financial vulnerability requires high-quality data. Yet information about vulnerable Canadians is limited for at least three reasons. First, national surveys often under-represent people with low income because of barriers such as lack of a fixed address or land line telephone. Second, with their focus on quantification and representative sampling, national surveys offer limited insights into people’s financial lives. Finally, these surveys are designed to capture a point in time and fail to reveal the complexity of vulnerable people’s finances. There are few, if any, studies that examine the lives of financially vulnerable Canadians. The financial diaries method was initially developed by David Hulme at the University of Manchester and has been applied in various countries around the world: Bangladesh, India, and South Africa (Collins et al., 2017); the United States (Morduch & Schneider, 2017); Scotland (Biosca et al., 2020); and as a pilot project in Canada (Buckland et al., 2013). It is variously fashioned—sometimes more quantitatively focused and sometimes using mixed methods—to intensively track participant household finances for a period in order to understand the financial reality of lowincome and vulnerable modest-income households that may otherwise be poorly understood through standard research methods. The Canadian Financial Diaries project collects quantitative data about the financial flows of participants and qualitative information about their financial experiences, well-being, and financial decision-making. In the first phase the project, 28 participants tracked their financial data on a weekly basis over the course of a year2 and met weekly or semi-weekly with researchers 1 One of the authors (Buckland) was a part of the interviewing team for this project and is involved in analyzing the quantitative and qualitative data flowing from that phase. For more information about the project, please see Canadian Financial Diaries Research Project, at https://www.financialdiaries.ca. 2 Recruitment began in early 2018 and the first interview began in March 2018. New participants were recruited and brought into the process in a staggered way. Participants were recruited through various means, including non-profit agencies, word-of-mouth, and social media advertisements. As some participants dropped out, new participants were

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to share their data and talk about their finances. This methodology allows researchers to understand the financial dynamics of vulnerable Canadians in a rapidly changing socio-economic context, including understanding the barriers and opportunities that they face in trying to improve their financial and overall well-being.

Financial Diaries Participants Although the Financial Diaries project collected data from individual participants, the project was conceived with the household, with its finances and financial decision-making, as the foundation. Using the household as the basic unit has the advantage of enabling analysis of intra-family dynamics, and so participants were asked to represent their household. However, as noted below, many participants were single, in which case the individual constituted the household (Table 3.1). In some situations, a participant (e.g., Perlah) decided to share only their individual data. However, even where quantitative data were limited to the individual participant, qualitative data were collected about the entire household. All participants had low to modest incomes. All were initially based in Winnipeg, but two moved elsewhere during the year of the project. Twenty-three participants were women and five were men. They ranged in age from 19 to 63, with an average age of 42.2 years. Education levels ranged from having completed grade 9 to completing a postgraduate degree, with an average of 14.2 years of schooling. Household sizes were small, averaging 1.7 people, in part because so many participants (19) were single-person households. Most participants (22) rented their accommodation, two lived with their parents, and four owned their home. Twenty-one participants had an internet connection at home, and interestingly, 27 had a smartphone or tablet. Six participants identified as Indigenous persons, and 13 had come to Canada after birth. Employment had an important bearing on the participants’ financial positions. Eight held full-time jobs, seven had one or more part-time jobs, and 11 were mainly unemployed, and two were retired. Per capita annual income ranged from just under $5,000 for Namid, a nearly homeless participant, to just over $42,000 for Eniola, a newcomer Canadian who added until October 2018. Data collection was completed in October 2019. For more details on the Phase 1, please see Dueck-Read (2019).

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Table 3.1 Socio-demographic indicators of Canadian financial diaries participants Age Highest level of education General

Average 42 Min 19 Max 63 Yes No Gender Female 23 Male 5 Other 0 Housing Rent 22 Own 2 Other 4 Employment Full-time 8 Part-time 7 Unemployed 11 Retired 2

14 9 18

People living in household 1.7 1 5

Per capita household income

Net assets

Credit Internet card connection own

$18,869 $21,078 $4,986 −$24,416 $40,764 $249,523 21 7

21 7

Source Author’s own creation

landed a professional position soon after joining the project. The average per capita annual income was just under $19,000. Net assets ranged from just under—$24,000 (Jacquelyn, carrying consumer debt) to just under $250,000 (Donna, a homeowner), with an average of $21,078. All participants had bank accounts, and 21 had credit cards, although several rarely used them.

Diversity in Financial Capability Among Financial Diaries participants we discovered a great diversity of financial management capacities. In general, most participants managed their finances very well, subject to their limited incomes and the financial goals that they had. There were some participants who evidenced challenges (e.g., “tunneling,” or restricting their attention to the present and not thinking about or planning for the future). Participants with low incomes demonstrated competence in everyday financial literacy, the types

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of capabilities needed for people with limited finances. These competencies center on managing day-to-day finances, tracking finances, paying bills, and managing small lump-sum payments. Participants with modest incomes exhibited competence in these areas as well as in longer-term financial literacy skills related to managing larger savings associated with home purchases and retirement planning. These skills were not seen among participants with low incomes, not because of some incapacity but because of a lack of these assets. Some participants evidenced financial challenges. For instance, two participants with low incomes had trouble thinking about strategies that would enable them to get a better job. Kateryna would not talk about or, according to her, even think about advancing in a new formal-sector position that she had got. Another participant, Mary would not make an appointment with an agency to help her update her résumé to apply for a new job. In both cases, it appeared that the participants were “tunneling”: instead of planning and enacting longer-term job strategies they were entirely focused on daily needs. This appeared as an entirely rational behavior given their circumstances and will be discussed in more detail below. Other participants engaged in credit strategies that seemed harmful. One individual relied on payday loans, another drew more and more credit from her HELOC (home equity line of credit), and another placed her lump-sum income tax return into her checking account (making it subject to use).

Agent or Structure? A debate in the popular media and among scholars revolves around who or what is responsible for a person’s financial position. Is it a result of the choices that person makes, is it limited by the structures and institutions they face, or is it some combination of the two? The agent-focused view holds that a person is poor because they are not working hard enough. The objection to this explanation is that it blames the victim. The structure-focused view states that poverty flows from an individual’s lack of options for education, work, and other social supports. Their choices are limited and none of them are very good, says the structural approach. The former approach prescribes better motivation for the agent, while the latter approach prescribes more equitable structures and institutions to give the agent more options. So what drives the poverty, the agent or

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the structure? Is it internal to the person, or is it outside that person’s control? Someone with a middle-income living, with a full-time and permanent job and living in a middle-income neighborhood, operates in an environment that a person with low income, casual work in a low-income neighborhood could only hope for. Excellent transportation enables the first individual to access many grocery stores, banks, or just go online to order goods with a credit card and then move money around using internet bank access. It is quite the opposite for people like the Financial Diaries participants. Several participants with low incomes reported paying $16/month in bank fees for a deluxe bank account. Kateryna, whom we met above, is an older single woman living below the poverty line and is precariously employed in part-time positions consisting of one informal job and one formal-sector job. But she is very careful with her spending and manages to make ends meet, week after week. She lives in the inner city and is nervous about taking out a lot of cash, so she uses her debit card since she does not want to use a credit card. Although she has a bank account, she finds herself underbanked in the sense that she does not have all the services that she would like, including an ability to track her bank transactions and access to a savings product for depositing lumpsum receipts (e.g., income tax refund, previous job payout). In today’s financial marketplace it is very easy to access one’s accounts online and very cheap to set up savings accounts that cost very little, if anything. So why doesn’t Kateryna take advantage of these opportunities? Kateryna lives in the North End of Winnipeg, where there are very few banks. Moreover, when she visits banks in the downtown, she is poorly treated. She does not have a computer or access to the internet, nor sufficient interest or finances to get them. This is a common story with respect to banks and people with low incomes: banks are inaccessible, their staff are often uninterested in helping them and do not encourage them to use more of the bank’s services (Buckland et al., 2010). By contrast, fringe banks like Money Mart are more accessibly located, their staff are more welcoming, but they offer relatively expensive transactionoriented products (e.g., check cashing, bill payments, money transfer) that people with low income often use. We asked Kateryna about her relatively expensive account, and after our conversation she went and spoke with the bank about it. She was advised to try to reduce her number of monthly transactions and then come back; then they might switch her to a lower fee and more limited account. Kateryna faces a hard choice

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(expensive account with many transactions vs low-fee account with limited transactions) that is deeply affected by institutions available to her (few mainstream banks, many fringe banks) and structures (low income and cannot afford computer or internet) that she faces. If other institutions and structures were available to her, she might choose differently. For instance, if she had a computer, if internet was available, and if there were many approachable banks in her neighborhood, then she might have access to good bank-account record keeping and a savings account to accumulate some savings. Mary, precariously employed like Kateryna, lost one of her two casual jobs when the company folded. She needed to update her résumé and find new jobs to apply for. Both tasks were difficult because she also has no computer and no internet access. She had to rely on a local nonprofit to help her with her résumé, and she had no good strategies for finding a job. The result was that she did not find a job during the Financial Diaries project (but did a few months later). This supports the idea of scarcity put forth by Mullainathan and Shafir (2013), whereby a person facing some type of scarcity (e.g., money, time, attention) ends up concentrating on a narrow set of goals at the expense of the full set of goals. Mary faced a scarcity of employment and income and therefore ended up focusing excessively on her short-term goals of having enough money to pay her daily bills. This “tunneling” made it difficult for her to think about ways to achieve her long-term goal of getting a better job. In a sense, she was being nudged out of the workforce and toward reliance on social assistance (note that her strong reluctance to access social assistance may have been what enabled her to persist and eventually get a job). But what if Mary had had access to a computer, training to use it to revise her résumé, and help in using web-based resources to find a job? The time that it took her to find a job could have been easily reduced. Engaging with the economy and finances requires access to the internet, which in turn requires skills and hardware that often older people do not have. Is this the fault of the individual? Or is it the consequence of a rapidly changing structure? Data from the Financial Diaries project show that we cannot really say if the causes of poverty are internal or external, agent or structure, as it is hard to disentangle these causes and their effects. Rather, we are all influenced by a combination of internal interests, principles, and goals, and these are shaped by the external environment in which we live and work. The household makes the financial decision, but this decision is rooted

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in structures and institutions coming from community, national, and international levels and determined by economic, political, and cultural pressures and priorities (Fig. 3.1). The nested model of household finances places the household, with various assets that will be discussed below, in the center, surrounded by a series of enlarging concentric rings representing structures with ever more distant influences. The household seeks to achieve financial wellbeing in a way that is consistent with its members’ values and interests. These strivings are enabled and limited by a variety of things that happen outside of it: local institutions and socio-cultural influences, markets and financial markets, and government policy. Each of these categories will

Policies

Markets & financial services

Local institutions & socio-cultural influences

The household

Fig. 3.1 Nested model of household finances (Source Author’s own creation)

3

Fig. 3.2 Financial well-being and vulnerability (Source Author’s own creation)

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Financial well-being - Grounded in values - No worries

- > Needs Financial vulnerability - Not grounded in values - Worries - < Needs

be described in more detail in subsequent chapters. The local level, discussed in Chapter 4, is the geographic and virtual neighborhood that the household operates within, which could consist of an urban innercity neighborhood.3 The next level in the nested model of influences is the national market and in particular financial services. We discuss this level in Chapter 6. The final level of influence is the policy level, which is typically controlled by the state, although under neoliberalism the state’s freedom is seriously constrained and more freedom is given to market actors. This level will be explored in Chapter 2. Chapter 7 (Theories) and Chapter 5 (Household as Financial Manager) provide insight on the context of financial vulnerability and the household’s role.

Financial Well-Being and Financial Vulnerability When asked to characterize financial well-being, a small group of Financial Diaries participants identified three critical features: finances that are grounded in one’s values; a lack of worry about one’s finances; and financial resources that are slightly more than one’s needs (Fig. 3.2). Financial vulnerability results from a lack of alignment between finances and values, worry about finances, /or needs that exceed resources. According to participants, grounding one’s finances in personal values involves focusing on needs and not being distracted by wants, along with seeing oneself as more than just a financial being (see below). Several respondents voiced

3 This could also be a rural and remote community, such as a First Nations community, but this book is focused on urban and low-income neighborhoods.

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the idea that paying undue attention to wants and engaging in excessive consumerism comes at the expense of one’s financial and overall well-being. This pursuit harms relationships and forces a person into higher spending and higher-stress jobs. Some better-off diarists rejected Canadian culture’s excessive emphasis on consumption and embraced the notion that by restraining their consumption, working in lower-stress jobs, and putting aside income for future needs, their life could be better. A financially vulnerable person, they argued, is one who relies heavily on consumption to meet their deeper needs. Next, participants identified an absence of worry about money as a key feature of financial well-being. Financial vulnerability means being subject to “money worries.” So many aspects of our material lives are determined by how much money we make and have. In Canada, many aspects of health care are exempt from this concern, but basic needs, utilities, recreation, and education all involve a financial cost. “Making ends meet” involves paying for these things, and when a person’s income and assets are limited or volatile, meeting payment deadlines may be tough and worry can result. Diary participants noted that a state of financial wellbeing means that the deadlines are easily met. Conversely, worrying about money was both a symptom of and a factor causing financial vulnerability. Worry is experienced when money is tight, and this harms one’s sense of well-being. And paradoxically, worry can lead to spending more in order to “bandage over” the worry. This could increase financial vulnerability. Finally, participants identified that having finances that were slightly more than they needed brought them to a state of financial well-being. This enabled them to manage worry, mentioned above, but it also enabled them to engage in special things that they did not understand as needs. One older diary participant shared that she had enough materially, but she would like to have a little bit more to do things such as travel. The travel she envisioned was to visit family members in another city in Canada.

Finances and Overall Well-Being Insights from the Canadian Financial Diaries project support a holistic notion of human well-being, as opposed to the notion that well-being is strictly determined by personal finances. This applies to participants with low incomes as well as those with modest incomes. Diary participants revealed a mixture of needs and interests that included financial, social, and psychological dimensions. Finances are one, albeit important,

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facet of human well-being or vulnerability. Social and psychological interests and needs were also clearly evidenced. Some participants, the group of financially resilient voluntary simplicity advocates described below, seemed relatively disinterested in career climbing and more interested in a lifestyle that connected with their values, which included concern for the environment. Other participants, like some financially vulnerable casually employed participants (e.g., Kateryna and Mary) were satisfied with their limited finances and only wished for a little “padding” to be able to cope with crises. Many participants valued caring social connections with family and friends and a sense of emotional peace. A related insight is that “healthy” finances, emotions, and social relations seemed to move, or not move, together. Among diary participants, those who had more healthy finances also seemed to have more healthy emotions and social relations. For instance, Kateryna, with very limited finances, was at peace with that and talked about harmonious relations with family and friends. But those who were in financial crisis were often struggling in social relationships and with emotional distress. Jacquelyn was having difficulties with her finances but was unable to share this problem with her family to get support. This meant that she was pressed into supporting her family, when in fact she probably needed help from them. These insights suggest a conception of human well-being that is multidimensional and not hierarchical (Fig. 3.3).4 This is a holistic notion of well-being and inconsistent with one focused on finances, or a homo economicus approach. The homo economicus notion, associated with neoliberal thinking, posits that money is the route to well-being and that a society’s happiness is easily determined by the average income of its members. The Financial Diaries results suggest, for that group, something quite different—that human need includes material, emotional, and social dimensions. This sense of human well-being is consistent with Denis Goulet’s (2006) transcultural human needs framework. This framework identifies material sufficiency, a positive identity as an individual and

4 This model appears to be at odds with Maslow’s (1981) hierarchy of human needs, but perhaps it is not. Maslow argued that material needs must be met before a person can address higher needs such as social, emotional, and spiritual needs. But he did not say that as their standard of living increased, people would always have to meet revised material standards before they could move up the hierarchy.

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Fig. 3.3 Dimensions of human well-being (Source Author’s own creation)

Psychological

Material

Human well-being

Social

member of a collective, and a sense of control over elements of one’s life as core aspects of human well-being. This is in no way intended to justify poverty, as it is an injustice and unfair. But it is to say that people who live on low and modest incomes have agency and do the best they can. The Financial Diaries research suggest that rather than seeing such individuals as less hard working and less capable than those with higher incomes, it might be more accurate to admire people with low incomes for their capabilities. At the same time, policies and practices that reduce poverty are absolutely needed.

Analyzing the Financial Resilience of Diary Participants Based on quantitative and qualitative data, 23 of the participants5 were grouped into one of the following categories: financially resilient, financially vulnerable, and in financial crisis. In Chapter 1, we defined a financially resilient person or household as one who, in the face of a spending or income shock, can respond in such a way as to minimize their financial, psychological, and/or family harm. Also in Chapter 1, we defined financial vulnerability as the threat of financial hardship, and 5 There was insufficient data to categorize the remaining five participants.

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financial hardship, in turn, as the inability to maintain a given standard of living. And, finally, we defined financial crisis as an actual experience and worry about a substantial deterioration of one’s finances, including more debt, less savings, lower income, and/or higher essential spending (e.g., an urgent medical issue).

Financially Resilient There were nine participants in the Financial Diaries who evidenced the most financial resilience. This group was least likely to experience financial vulnerability and most likely, in the event of a financial shock, to be able to bounce back from it. In terms of their sociodemographic characteristics, these people were young in age (20s and 30s); most were single, employed full time, and had family networks (some lived at home). Most had a university undergraduate degree, and some had a graduate degree. All these participants were resilient in that they had plenty of resources, such as financial assets, human capital assets, and family assets that they could draw from if they faced a crisis. Most had savings in the bank, and some, such as Tyler, were actively saving money throughout the diary process. Three participants moved (either within Winnipeg or to another city) during the diary process, and their finances were adequate to support their move. These participants were also well educated, and this enabled them to have or work toward stable and full-time work. Two participants, Eniola (introduced above) and Aretta, were in the process of moving from entry-level work in the social services into professional positions. These two Canadian newcomers had recently graduated from professional university studies and by landing a professional job were moving into a position from which they could apply for Canadian citizenship. Many participants in this group also had family support to draw on. For instance, Roya and Izara still lived at home and did not pay room and board. Tyler, Helena, and Kira regularly spoke during interviews about emotional support they got from family and friends. Family support worked both ways: Eniola and Aretta were very supportive of their respective families, who lived in their countries of origin. This support came in the form or regular monetary support and, in the case of Aretta, inviting her brother to migrate to Canada and live with her. In terms of the asset map often used to assess people’s finances, this group did well in all asset categories (Fig. 3.4). They had social capital with a strong family and friend network. They had human capital

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Social capital

Physical capital

Livelihood assets

Financial wellbeing Financial capital

Human capital

Fig. 3.4 Asset map of household (Source Based on sustainable livelihoods map, U.K. Department for International Development, see Solesbury [2003])

resources that included the more typically thought-of elements such as a good education, but also less commonly included elements such as emotional strength. Members of this group had financial assets in the form of some savings and/or borrowing capacity. They did not have much by way of physical capital. They all had a full-time job, which one can think of as a “livelihood” asset in the sense that a job is a source of income, but it is also a source of a professional network, training, benefits, and future jobs. All these assets enabled these individuals to be financially resilient. Within this group of financially resilient participants, we identified two quite different subgroups. One was a career-oriented Canadian newcomer group, and the other was values-focused settled “voluntary simplicity” group. In the career-oriented newcomer group, Eniola’s and Aretta’s stories have been discussed above. Other participants seeking this same

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path included Avi, and potentially Izara. These newcomer Canadians6 were working very hard on education and one or more jobs to build their capabilities, advance their careers, and, in some cases, gain Canadian citizenship. The voluntary simplicity group included three people who were recruited through one original participant. All were single, well educated, and committed to principles that put values such as the environment above careerism. Tyler, the frugal saver discussed previously, for instance, was a young man in his 30s who during the Financial Diaries project saw his job shift from part time to full time and added a variety of other livelihood activities to pursue a varied and interesting life. Kira worked at a local discount store, moved from living with her parents to her own apartment during the diaries project, and was very active within her faith community. Like Tyler, she was well educated and did not present strong career ambitions like the newcomer group.

Financially Vulnerable Another group of nine participants could be considered financially vulnerable: each of them had experienced some financial decline and the risk of further and more substantial financial decline loomed in the future. Participants in this group practiced one or more of the following strategies: limiting spending to income, spending frugally, regularly tracking their finances, limiting their access to or interest in credit such as credit cards, and not using unsafe credit. This group included one person who held a full-time job for part of his tenure with the diaries project, four participants who relied on social assistance for their spending, three participants who worked on a casual, part-time, and not permanent full-time basis, and two retired individuals. These participants were not in a financial crisis (discussed next), but unlike the resilient group, they had experienced some decline and they could, or felt they could find themselves in a deeper financial crisis. Many of them had tracked their finances before joining the diaries project, and some valued working hard. The four participants who relied on social assistance were able to keep their spending within their limited income. This was facilitated, according to some of them, by not having access to major sources of credit.

6 This refers to refugees, immigrants, and other first-generation Canadians.

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Ochieng, for instance, a single middle-aged person who had come to Canada as a young adult, had a disability that limited his employment options. He was very careful with his spending and did not use a credit card. Annette, a middle-aged divorced person, was similarly careful with her spending. She did not have a credit card. The more casually employed participants in the vulnerable-but-not-in-crisis group included three people: all single women, all earning a modest income, and all careful with their spending. Kateryna (discussed above) and Nita had credit cards but were careful to limit their use; Mary (discussed above) did not have a credit card. All three worked very hard at their places of employment. Kateryna and Mary had pulled together a few jobs to create a livelihood, and Nita was a foster parent for several children. Even when one of Mary’s jobs was ended, she was able to recover by borrowing from a family member. This covered her needs until she was able to get a full-time job (after the diaries project ended, we learned through our pandemic follow-up survey). Donna was retired, had an income higher than the social assistance recipients, and kept careful watch over her spending. Donna and Nita shared a financial vulnerability in that they were almost over-generous in support of their adult children to the extent that their own finances were at risk. The one full-time employed person, for a portion of the diary process, Francois, was categorized as vulnerable because he is new to Canada, he and his family struggled with language barriers, and the family’s spending was surprisingly high. Their vulnerability related to what would happen if there was a job loss. When assessed in terms of the asset map, the financially vulnerable group suffers from lower levels of one or more of the assets as compared to the financially resilient group. Like those in the financially resilient group, most vulnerable participants had a family and friend network, but their networks were smaller. As relatively older than those in the resilient group, vulnerable participants also tended to be more on the giving end of the relationships. Their education levels were not as high, but they were an emotionally resilient group of people. Their financial and physical capital levels were also lower than the resilient group and none had a full-time job, so that their livelihood assets are more limited.

In Financial Crisis Five Financial Diaries participants, two employed and three relying on social assistance, were categorized as being in financial crisis: they were experiencing or had recently experienced a substantial financial decline and emotional crisis. What is very clear from these participants’ stories is

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that financial crisis is associated with income-spending gaps and mounting debt, as well as with several other factors linked to emotional health, and family and friend networks. Participants experiencing financial crisis had one or more of the following experiences: • difficulty keeping spending within income limits • unsustainable debt, including the use unsafe credit products or unpaid utility/phone bills • complicated/stressful family relationships and family history • emotional turmoil Take, for instance, two low-waged people, Jacquelyn and Sarah. Jacquelyn was in her mid-30s, a single person and casual worker who had accumulated around $20,000 of debt through credit products such as payday loans. Jacquelyn also struggled to resist pressure to support struggling family members, and this impacted her finances as well. Sarah, also employed in a minimum-wage job with a similar accumulation of debt, was in her mid-50s, divorced with adult children. Both participants, while able to record their finances, were unable to keep their spending in line with their income. The consequence was rising debt. And this rising debt caused them financial and emotional challenges. Three other participants, each relying on social assistance, could also be categorized as being in financial crisis: Linda, Mia, and Namid. Linda was a 63-year-old woman who received social assistance. She had family but the supports flowed disproportionately from her to them. She struggled to keep her spending in line with her income. Paying bills, especially cellphone bills, was an ongoing struggle for her. Unlike Jaquelyn and Sarah, the employed participants in this group, Linda did not have credit card debt but had a $3,000 unpaid utility bill. Mia was a mother who gave birth to twins during the diary process and had three other children in care. She was transitioning from living in a residential support program to becoming independent. She tried very hard to maintain her diary but ended her involvement early, sharing that it was too stressful for her to continue to track her expenses. Namid was more deeply in financial crisis, nearly homeless and struggling with a substance abuse issue. His meager finances from social assistance barely covered his housing and food after supporting his addiction.

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Each of these five participants was in a crisis of one kind or another. The crisis was manifested in an inability to pay bills for all participants, including servicing debt for the employed participants. Their financial crises were accompanied by emotional stresses, complicated family relationships, and in some cases rising debt or diminishing assets (e.g., Namid’s housing). These participants saw themselves in or had a feeling of financial crisis, and the crisis was interconnected with other crises or issues related to their social and physical lives. These participants’ position in terms of the asset map (Fig. 3.4) is very weak. Some had very weak social supports while other participants, even in their crisis condition, were supporting others. Human capital assets challenges include limited formal education and, importantly, emotional turmoil, which seem to play an important role in distinguishing between those who are financially vulnerable and those in crisis. This group had very limited financial assets and virtually no physical assets. Interestingly, two of the five participants in this category had work but even with this livelihood asset, other asset limitations overwhelmed this particular strength. The three other participants without employment did not have that to rely on.

Financial Resilience Pathways Financial wellness is not necessarily permanent. Shocks can move someone out of a state of well-being, and their level of resilience will help to determine the duration and depth of the shock. One way to think about this is through the concept of walking on a pathway. In our lives, we all walk down a financial pathway that keeps us on track and prevents us from getting lost. Some people walk on higher, or wealthier paths, and some walk on lower, or poorer paths. Even though we are moving forward on the path, there are barriers alongside it that prevent us from moving to a higher or lower pathway. For some people the “upper” border of the path is porous, thanks to greater opportunities, making it relatively easier to move to higher pathways. Access to higher education, cheap credit and other banking services, and new investment opportunities can move a person to a higher pathway. For people with low and modest means, it is more likely that the “lower” side of the path is porous, making it more likely for them to move to a lower financial path. Shocks such as illness, job loss, wage reduction, and global pandemic can move people off their initial pathway if they are vulnerable. Another way to stretch

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the metaphor is to say that the pathway walked by a vulnerable person is narrow, and the mildest shock can move them off it. Households that are more resilient travel on wider pathways, so shocks do not necessarily bump them into another path. Consider some of the Financial Diaries participants that have been featured in this chapter. Tyler, as we have seen, was a younger single man with an undergraduate education who aspired to work in a socially constructive profession and was committed to living a simple lifestyle. He was “upwardly mobile”; that is, he could easily have gone after and found a higher paying job. And Tyler may in future do so. But for the time being, he was committed to working in an organization that had a strong social mission and paid him a wage not substantially higher than minimum wage. During the diary process, Tyler lived a very simple life and was able to save a substantial portion of his relatively low income. The savings went into various types of registered savings products. His financial resilience pathway was much broader than that of many diaries’ participants. He was better educated, younger, very confident with the information communication technologies needed to find new work, and had more savings. If Tyler had lost his job (which he did not), he would have been able to find a new one. In Tyler’s case, small shocks might have pushed him to the side but only within his pathway. Kateryna, a single and middle-aged woman living in a low-income neighborhood of Winnipeg, relied on casual work for her income. At the start of the diary process she was satisfied with her income, but given the nature of her casual employment she was quite vulnerable. Her pathway was narrow, and a minor negative shock might have caused a major impact. However, during the diary process she obtained a second job with a formal-sector employer that provided her part-time hours, a wage slightly above minimum, and a certain amount of job security. In a sense, this shock pushed her off her pathway and upwards onto another pathway. This new pathway was parallel and steady, not an “upwardly mobile” expressway, but it traveled at a slightly higher level than the one Kateryna was on originally. The new path was a little wider, given her new second job with steadier hours and regular pay. The new job offered training and alternative hours packages that might have led Kateryna on an upward pathway, but—at least throughout the Financial Diaries process—she declined to engage in this. In conversations with Kateryna, she shared that she did not want to think about the future and make plans. She evidenced some psychological barriers to moving up. The reluctance

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to move up might have been because of trauma that she had suffered in incidents with previous jobs. She talked about those events, including harassment, but never made a formal connection between them and her reluctance to move up. Other participants experienced a downward movement in their financial resilience pathway. Mary, as described earlier in this chapter, relied on two casual part-time jobs. Early in the diary process she lost one of those jobs as the business closed. This significantly reduced her income, and since she was alone and had few other options, she was very vulnerable. The resilience pathway for her was very narrow. Her disinterest of computers and the internet limited her ability to prepare for, apply to, and find a job. However, support from her father meant that Mary was able to avoid being bumped too far off her financial well-being pathway: she was able to borrow money from him on a regular basis to help pay for her rent.7 However, the job loss demonstrated her vulnerability—one more small shock could have been very serious. Another social asset that Mary had was working with a social worker. We learned that the social worker provided advice and access to information that Mary otherwise might not have known about. Mary was encouraged to apply for social assistance, but she was very reluctant to do so because she had relied on it in the past, and she felt that to do so would constrain her freedom excessively. Another financial bump may have led Mary to move to social assistance, which might have provided her some of the income that she needed but would also curtail the freedom that she highly valued. Mary was satisfied with her level of financial well-being and she had a certain amount of resilience, but the pathway she was on was narrow and she could be bumped off it at any time.

Conclusion This chapter has presented a framework with which to understand the finances, vulnerabilities, and resiliencies of Canadians with low and modest incomes. The nested model illustrates how vulnerabilities and resiliencies are rooted in both the agent’s capabilities and the structures within which they operate. To “blame the victim,” or to say that 7 Whether this was a loan or a gift is unclear. Mary described it to us as a loan, but since the amount accumulated over time and she did not make repayments, one wondered if eventually it would become a gift.

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structures are entirely responsible for their financial status, does not make sense given the reality of most people’s financial lives. However, as results from the Canadian Financial Diaries project show, people with low incomes face particularly binding constraints that include structures such as low wages, low levels of social support, poor banking services, and weak public supports. Financial literacy levels are often more than adequate for everyday finances, and if income and financial services could be boosted there is no reason to believe people would not invest in the human capital of longer-term financial literacy. The supply (of income and financial services) would likely lead people to demand financial literacies around savings, investing, and longer-term borrowing (e.g., mortgages). Of course, supplying financial literacy in various packages, such as training programs and coaching sessions, would likely experience a growing demand as these supply-side circumstances are put in place. Among Financial Diaries participants, there was evidence of tunneling, which can lead a person to behave in ways that undermine their longerterm interests. But there was not evidence that this was widespread and a deep explanatory variable for all diary participants. The diarists, with their modest finances, pointed toward a holistic notion of well-being that sees finances as one part of the whole. Participants with the highest levels of financial well-being—those who were resilient—had higher levels across more types of household assets: human, social, financial, physical, and livelihood. Participants who were vulnerable or in financial crisis had lower levels of one or more of these household assets. The pathway concept shows the durability of different levels of financial well-being and how they tend to be, for low-income participants, upwardly rigid and downwardly porous. In the next chapter, we move from the household level to examine the Canadian urban modest-income neighborhood to see how factors such as income, race, and gender can interact with local economic and social structures to reinforce financial vulnerability.

Works Cited Biosca, O., McHugh, N., Ibrahim, F., Baker, R., Laxton, T., & Donaldson, C. (2020). Walking a tightrope: Using financial diaries to investigate day-to-day financial decisions and the social safety net of the financially excluded. Annals of the American Academy of Political and Social Science, 689, 46–64. http:// ann.sagepub.com.uwinnipeg.idm.oclc.org/content/by/year

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Buckland, J., Brennan, M., & Fikkert, A. (2010). How well are poor people served by Canadian banks? Testing consumer treatment using mystery shopping (Research and Working Paper No. 48). Winnipeg: Institute of Urban Studies. Buckland, J., Fikkert, A., & Gonske, J. (2013). Struggling to make ends meet: Using financial diaries to examine financial literacy among low-income Canadians. Journal of Poverty, 17 (3), 331–355. Collins, D., Morduch, J., Rutherford, S., & Ruthven, O. (2017). Portfolios of the poor: How the world’s poor live on $2 a day. Princeton University Press. Dueck-Read, J. (2019). Canadian financial diaries: Methods report on Phase I . Winnipeg: Canadian Financial Diaries Research Project. https://financialdia riesca.files.wordpress.com/2019/09/diaries-methods-report_public.pdf Goulet, D. (2006). Development ethics. In D. A. Clark (Ed.), Development Ethics (pp. 115–121). Edward Elgar. Lederach, J. P. (1998). Building peace: Sustainable reconciliation in divided societies. Washington: USIP Press. Maslow, A. H. (1981). Motivation and personality. Harper and Row. Morduch, J., & Schneider, R. (2017). The financial diaries: How American families cope in a world of uncertainty. Princeton University Press. Mullainathan, S., & Shafir, E. (2013). Scarcity: Why having too little means so much. Times Books, Henry Holt and Company. Solesbury, W. (2003). Sustainable livelihoods: A case study of the evolution of dfid policy (Working Paper 217). London: Overseas Development Institute.

CHAPTER 4

Socio-Cultural and Economic Institutions at the Local Level

This chapter explores the context in which many low and modest-income Canadians live, focusing our analysis on the inner city and inner suburbs that are a location for many people with modest incomes. We begin by examining how the spatial location of modest-income Canadians has shifted over time, then draw on the concepts of social exclusion and social capital to understand the barriers and assets of residents in these communities. We also examine how class, race, and gender interact in modestincome neighborhoods. The chapter then digs into certain economic features of these neighborhoods, including poverty rates, social protection levels, and the informal economy. The final section surveys housing, retail, and food and health security in modest-income neighborhoods.

Migrating Poverty from the Core to the Suburbs The urban context of low- and modest-income people varies over time and region.1 In the Global South, urban poverty is associated with slum settlements constructed out of impermanent houses, often located on public grounds, such as land adjacent to railway lines. In Europe, urban spatial poverty has tended to be a suburban phenomenon, where large 1 This chapter uses “inner city” and “modest-income neighborhood” to refer to the geographic spaces in which many, but not all, people with low and modest incomes reside.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 J. Buckland and B. Spotton Visano, Financial Vulnerability in Canada, https://doi.org/10.1007/978-3-030-92581-9_4

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low-rent units are available. In post-World War II Canada and the United States, the inner-city ring around the downtown was most often associated with concentrated urban poverty. This was the result of suburban real estate development after the war that led many working-class innercity dwellers to migrate to the suburbs for more space and newer housing. But these inner cities were never completely “de-gentrified,” and over time, with the establishment of rapid transit corridors and changing preferences (away from the suburban, toward urban, and natural features such as waterfronts), the middle-class demand for inner-city space has grown. This gentrification process has implications for neighborhood housing. Neighborhoods with a low average income in Canada, like others around the world, face many challenges. As we shall discuss below, residents face various social, cultural, and economic barriers that can diminish their well-being. Unemployment, living below the poverty line, and experiencing local crime are examples of this. But to focus on deficits and barriers is to unfairly represent these neighborhoods, because they also exhibit resilience and have assets. These assets are economic as well as political and social in nature. The socio-political assets are discussed below. Economic assets include local businesses and employers, such as a food banks and thrift stores. In many cases these local social, cultural, or economic activities predate the formal market or state activities but have virtually disappeared in wealthier neighborhoods where markets and the state are more energetically engaged. Urban modest-income communities have both assets and, as Porter (1995) argues, potential assets. Potential is emphasized because the inner city has certain features that have tended to highlight their disadvantage and obscure their advantage. Porter points out that the inner city’s strategic location (in between the downtown and suburbs and therefore enjoying proximity to both) makes it ideal for retailers. Other businesses might fit as well, not to mention additional residences. The potential is great but unrealized. Why? There are various reasons. For instance, stigmatization and racism can hide the true economic value of a neighborhood. Instead of locating a retail shop, small enterprise, or residence in an inner city, stigmatization (e.g., fear about crime) or racism (fear of the other) leads businesses and developers to focus on suburban or exurban locations. Yet unstigmatized and non-racist economic calculations make the case for investing in the inner city. Focusing on neighborhoods where poverty is more concentrated can also be misleading for a few reasons. First, communities are not

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completely homogeneous: often some non-poor people live in a low- or modest-income neighborhood, particularly if it is gentrifying. Also, these neighborhoods are not sealed off from the rest of the society. People leave and enter to work, shop, visit, and pursue education. Finally, people with low incomes live all over a city, not just in modest-income neighborhoods. Nevertheless, many people with low incomes find their homes in neighborhoods with a low average income, which makes it useful to understand these neighborhoods’ social, cultural, and economic features. To do so, let us examine the concept of the “neighborhood effect” (Oreopoulos, 2008; Walks & Bourne, 2006). The neighborhood effect is the idea that a person’s livelihood, financial well-being, and quality of life today and into the future are deeply determined by the neighborhood they live in. Oreopoulos (2008) examines this question by comparing the relative neighborhood effect in Canada to that in the United States. Because of the similarities between the United States and Canada, and because of the huge body of research from the United States, this is an interesting and important question. Studies in the United States have found that the neighborhood effect is quite strong (Wilson, 1987; cited in Walks & Bourne, 2006), so there might be a tendency to think that a similar situation exists in Canada. However, Oreopoulos finds that the evidence for a substantial neighborhood effect in Canada is weak: living in a low-income versus a middle-income neighborhood does not make a major difference to a household’s well-being. As compared to the United States, people with low incomes are less concentrated in inner-urban locales, and “Canadian low-income neighbourhoods experience much lower levels of crime and visible-minority segregation than is experienced in US low-income neighborhoods” (Oreopoulos, 2008, p. 253).2 Peer effects, for example among classmates and friends, are likely more powerful than neighborhood effects. But there really is an inner-city phenomenon, even if it is less pronounced in Canada than in the United States. One way this is demonstrated is through voting patterns. McGrancee et al. (2017) examine how

2 Oreopoulos (2008) notes that African American and Hispanic Americans represent a much larger share of inner-city neighborhoods, at 75% (18% in other city neighborhoods), as compared with African Canadian and visible minorities in Canada at 36% (15% in other city neighborhoods): “Thus, the relationship between ethnic segregation and income segregation is much less in Canada [as compared with the United States]” (p. 243).

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political views are spatially based and note the classic urban-liberal versus rural-conservative divide does not hold in Canada today. Instead, they find evidence of a growing political divide between the inner city and the rest of the population: “Even after controlling for sociodemographic variables, an ideological polarization remains between inner city residents on the left and the rest of Canadians when it comes to values related to new ideology and policy preferences concerning personal taxation, social assistance spending, and moral policies” (McGrancee et al., 2017, p. 34). While the more entrenched and racialized nature of the inner city in the United States may be less pronounced in Canada, geography still matters in Canada, and urban poverty is an important issue. And this chapter examines features associated with neighborhoods with low average incomes.

Social Exclusion, Poverty, Social Capital, and Development A neighborhood with a low average income has social deficits and assets, along with economic ones. The terms social exclusion and social capital helpfully capture the deficit and assets of a neighborhood’s social structure. Social exclusion, a concept more popular in Europe, refers to the experience of people with low income that limits their ability to exercise rights and exert responsibilities that are understood to be available to that country’s citizens. These rights include access to services and fair treatment by the legal system. For instance, social exclusion highlights the way in which state programs such as social assistance and formal businesses such as banks engage with different communities and people. Modern institutions like these may reflect dominant culture biases and see these people as somehow less worthy, or in the case of businesses, simply not see them as a part of their business model. This is well documented in banking (see Chapter 6) but also exists in state institutions.3

3 Take, for instance, postsecondary education, which has historically been directed to

elite classes and then in the post-World War II period toward the middle classes, but only recently toward people with low income and people from different ethno-cultural communities. With this elitist or middle-class focus, people with low incomes have faced visible barriers (high fees) and invisible ones (e.g., colonization of curriculum) that prevent them from accessing, benefiting, and graduating from postsecondary institutions.

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Box 4.1 Barriers to Finding Work Social exclusion limits certain people’s access to institutions of the state and market that might better enable them to meet their social and economic goals. Mary, a Canadian Financial Diaries participant, worked at two casual jobs until one company went out of business. Because she did not have a computer or internet service to update her résumé and search for work, it took some time to find a new job. If better supports and access to information had been more available to Mary, the transition might have been less stressful. Without the funds to afford the computer and internet service she was passively excluded from institutions that could have helped her. Delayed job searches take a toll on a person’s finances and mental well-being. Mary was only able to afford the transition because her dad supported her through it.

A concept closely connected to social exclusion is the poverty trap. This refers to barriers that prevent people in poverty from experiencing change. One study, examining Indigenous peoples in the Global North, including Canada, finds that they face poverty traps that lead to chronic poverty. Maru et al. (2012) define poverty traps as a “self-reinforcing feedback loops that keep social-ecological systems in persistent poverty” (p. 1). They argue that while communities can resist the effects of outside dominance and colonization, these responses can further impoverish the community: Indigenous systems can act to resist the colonizing effects of government and market institutions, based on past experiences of prolonged injustices and ensuing mistrust. Indigenous livelihood systems can resist policies in an attempt to preserve aspects of life such as language, culture, and ceremonial obligations, which, if affected, can threaten their indigenousness. Although such a response to hostile socioeconomic and political environments may help maintain distinct identity, they may lead to further livelihood issues and contribute to poverty in many other spheres of life. (Maru et al., 2012, pp. 10–11)

Social capital, on the other hand, is an asset all communities have in some form (Coleman, 1998; Putnam, 1994). While social exclusion accounts for how modern institutions prevent certain groups from access, social capital imagines how groups of individuals engage with one another and the consequences of this engagement on their material lives. The

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idea is premised on the concepts of networks and norms. Networking refers to the form in which people interact. In a community in which people are economically networking—hiring neighbors, investing in a neighbor’s business, buying goods and services from their neighbors’ stores—networking fosters social connection and a strong economy. Moreover, communities are said to have a richer social capital when there is regular collaboration, when this collaboration brings people together in a variety of ways, and which ultimately enables them to collaborate in the material realm. A second feature of social capital is about how people collaborate. Do they collaborate in a reciprocal way? Does one good turn lead to another? If so, then once again, social capital is understood to be richer. So a community characterized by dense networks and collaborative and reciprocal engagement has strong social capital. And the converse is the case as well—a community with few networks and limited collaborative and reciprocal engagement has weak social capital. Community development is another way to conceive of a neighborhood’s social capital. There are several common approaches to community development, including utopian, reform, and critical schools. Utopian approaches to community development—for example, the Rochdale Principles from the mid-nineteenth-century UK, see communities voluntarily forming around egalitarian principles to form cooperatives to address human need in livelihoods, banking, and retailing (Michie, 2017). The motivation for these efforts is bringing people together to work for common purposes, and it is rooted in an optimistic view of human nature. This approach is common today and can work alongside—rather than trying to supplant—more competitive, market, and capitalist institutions. The utopian approach tends to appeal to certain people and therefore is not universally embraced. Reformist and radical approaches to community development make more universal (rather than voluntary) claims than do utopian approaches. Reformers like Porter (1995) argue, for instance, that poverty in inner-city neighborhoods is the result of market misallocations that can be rectified by active business investments. The state’s role is to provide appropriate infrastructure. Market reformers like Porter embrace human agency but tend to understate (or assume away) structural barriers: once businesses realize the profit potential to be found in the inner city, they will jump at the opportunity to locate there. Other reformist approaches call for certain types of state engagement, such as increasing education spending. The radical approaches to community development (Loxley, 2007) tend to focus more on the structural causes

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of poverty, for instance, barriers to education or employment to people with low incomes. They call for radical changes like asset redistribution to overcome poverty. So how do modest-income neighborhoods fare with respect to social capital? Whereas there is evidence that these communities suffer from social exclusion, there is no reason to expect a deficit with respect to social capital. But social capital cannot compensate for the gaps created by social exclusion. In the face of neighborhood violence and insufficient or counter-productive support from the police, local neighborhood-watch groups such as the Bear Clan Patrol in Winnipeg can seek to foster greater peace and less crime. But this does not overcome the systemic problems that people in modest-income neighborhoods face, such as poor-quality services that are underfunded and delivered in ways that reinforce bias and racism. Neighborhoods with low average incomes face this challenge: their social capital cannot overcome social exclusion, and the consequences for the community’s economy is negative, which spills over onto individual finances.

Class, Race, and Gender in Modest-Income Neighborhoods Class, gender, and race are features that vary across communities and can be the source of significant divisions. With respect to class—that is, one’s position in the economy—modest-income neighborhoods are by definition characterized by people with low incomes and therefore people with little control of their economic lives. They are more likely to be unemployed, underemployed, or employed at a low wage rate and are unlikely to be managers or own shares in major corporations. Also, modestincome neighborhoods are more likely to have a higher proportion of ethno-cultural communities than other neighborhoods do, particularly communities whose members have come to Canada as refugees. Indigenous people from low-income backgrounds are also disproportionately located in these neighborhoods. Gender can act as a compounding factor in that women are often relatively less empowered than men, and poorer. Women who are Indigenous or come from ethno-cultural communities, then, can face this multiple disadvantage. Keeping in mind the differences between US and Canadian contexts, it is useful to examine the neighborhood ethnicity-poverty issue in the United States before turning to Canada. Cabaniss and Fuller (2005)

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undertook a theoretical synthesis of work on the topic of gendered poverty and social inequality. In this study, they seek to explain the persistence of neighborhood-based poverty, including its duration, among some racial and ethnic groups, notably African and Hispanic Americans (Cabaniss & Fuller, 2005, p. 144). They observe that “living in a poor neighborhood compounds one’s poverty … race and ethnicity were linked with being in poorer neighborhoods … only 32.6% of poor children who were white lived in medium- and high-poverty areas, compared to 74.6% of poor children who were black and 65.9% who were Hispanic” (p. 156). This suggests that there is a neighborhood basis to poverty and that this varies by ethno-cultural group. African and Hispanic poor children are more likely to live in medium- or high-poverty areas. Cabaniss and Fuller further note that gender interacts with poverty and race to create a triple burden for women of low incomes from minority communities. Mothering children is one of the gender differences that lead women to face more barriers than men, because caring for children can act as a barrier to finding and retaining work. If race and gender interact at a neighborhood level to explain poverty, what happens over time? Is there evidence that these (race and gender) barriers diminish? Wilson (2010) argues that the effects of neighborhoodbased racialized poverty such as cultural barriers can accumulate over time. Repeated experiences of unemployment, poverty, and racism can reinforce cultural assumptions and norms that are hard to break free from. These views can be shared intergenerationally, in that “children may be taught norms of resignation” (Wilson, 2010, p. 211). This is not the culture of poverty theory (Lewis, 1959), but the theory that structural barriers generate cultural barriers, which over time, compound the challenges to overcoming poverty. Understanding that the social economy of neighborhoods in Canada is different from that in the United States, what can we learn about race, class, and poverty in Canada’s inner cities? In their spatial analysis of poverty across Canada, Chokie and Partridge (2008) find poverty rates higher in communities with larger shares of Indigenous people and newcomer Canadians (p. 333). A study focusing on Winnipeg’s inner city found evidence that poverty and race reinforce exclusion in modestincome neighborhoods among newcomer Canadians and Indigenous people. Ghorayshi (2010) notes that “inner-city residents are marginalized, face racism, live in isolation and lead parallel lives with little contact to the majority society. There exist many layers of separation” (p. 95).

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The newcomer participants in her research project reported experiencing racism in many ways: they felt uncomfortable about what they wore, about the color of their skin, and the level at which they were policed (p. 96). While not claiming that neighborhood-based poverty and racism are as deep as in the United States, Ghorayshi argues that neighborhood does play a role in processes of impoverishment in Canada. She argues that the neighborhood poverty-racism nexus is a result of the failure of liberal multiculturalism in Canada and calls for a more radical approach to interculturalism: “Interculturalism is about inclusion versus exclusion, belonging versus isolation, engagement versus marginalization, and is about everyone” (p. 99). What do people with low incomes say about the situation they face? A study by Ravensbergen and VanderPlaat (2010) used an action research method to engage people with low incomes in three Canadian cities. Participants shared their experiences of poverty that included trauma (poverty affects all aspects of one’s life—physical, mental, emotional, and spiritual), marginalization and isolation (feeling stigmatized and judged), silence (not being heard), and how poverty results from structures and systems (Ravensbergen & VanderPlaat, 2010, pp. 396–397). Participants called for reforms, including creating ongoing supportive community structures—“from policing and judging to supporting” (p. 398)—implementing policies to reduce poverty (income security, decent work, housing, etc.) and building social support to combat poverty (to counteract racism and discrimination). These responses are consistent with the intercultural recommendations from Ghorayshi. Box 4.2 Women as Primary Providers of Family Support In the Financial Diaries project, we heard from several single female participants who valued their family and community connections. They relied on spouses, adult children, and friends for physical and financial support. But what was also quite common was the sense that they too were relied on, quite heavily, by their families. At times it seemed that the primary direction of support was from the female participant to her family or community members.

Canadian neighborhoods with average low incomes might not be “ghettos” akin to modest-income neighborhoods in urban America,

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but these neighborhoods are over-represented by people from racialized groups, women, newcomer Canadians, and Indigenous people. The multifaceted nature of the barriers these people experience—from policing through inadequate education to social stigmatization—can compound challenges associated with their duration, which may encompass generations. These barriers prevent local economies from thriving, and this, in turn, limits the ability of residents to reach greater financial and overall well-being. Economic Issues Because 80% of Canadians are urban, urban poverty makes up the largest share of poverty in Canada. And while there are some regional dimensions to poverty, such as higher rates in certain regions like Cape Breton and First Nations communities scattered around the country, it is in the large urban centers where the greatest density of people with low incomes live. But there are important, nuanced differences in the character of poverty in different urban centers. This section will examine the share of people in poverty, the persistence of poverty, gender differences in poverty rates, and indicators of inequality by city. The numbers of people with low incomes are highest in the biggest cities—Toronto, Vancouver, and Montréal—but among these cities the share is highest in Toronto, at 13.4%. The share of people in Vancouver is quite a bit lower, at 10.6% (Fig. 4.1). Together, the big three cities account for 76% of people with low incomes in the group of eight major cities shown in Fig. 4.1. Winnipeg ranks second in terms of poverty share but with a smaller population, the number of people with a low income is much smaller compared with the biggest cities. On the other side of the scale, Calgary, Québec City, and Ottawa-Gatineau have smaller population shares of people in poverty, ranging between 5.7 and 8.2%. With mid-size populations, these cities’ poverty numbers are much lower than in the largest cities. The average gap ratio, which is how far the average low-income household is from the poverty line, we see that the gap is greatest in Edmonton, Montréal, Winnipeg, and Vancouver, ranging from 33% to almost 42%. The gap is the smallest in Québec City, Ottawa-Gatineau, Toronto, and Calgary, ranging from 25 to 31%. Edmonton and Winnipeg stand out in this figure in that they are midsized cities with high shares of low-income residents (10.1 and 11.2%,

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1000

45

900

40

800

35

700

30

600

25

500 20

400

15

300 200

10

100

5

0

0

Number

Percent

Average gap ratio

Fig. 4.1 Poverty in select cities: number, percent, and average gap ratio, market basket measure, 2018 (Source Statistics Canada. Table 11-10-0135-01 Low income statistics by age, sex and economic family type. https://doi.org/10. 25318/1110013501-eng)

respectively) who are farthest below the poverty-line threshold (41.5 and 36.3%, respectively). As illustrated by the “pathways” concept in Chapter 3, poverty can be episodic or permanent: people can move in and out of poverty, or they can be locked in more permanently. The duration of poverty has various causes, which are partly related to the local economy. Where that economy is more vibrant, one would expect more episodic poverty and shorter episodes than in a locale with a less vibrant economy. And the local economy may affect men and women in different ways. Cities in Alberta and in southwestern Ontario have the smallest share of people (20% or less) for whom poverty persists for five years of more (Fig. 4.2) and, with the exception of London and Toronto, the gender gap is relatively modest. In London and Toronto, women are more likely than men to experience longer periods of poverty. On the other end of the spectrum are cities on or near the coasts, in Québec, and on the prairies: Vancouver,

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5

25

4

23

3

21

2

19

1

17

0

15

-1

Gap

Males

Females

Average

Linear (Males)

Linear (Females)

Fig. 4.2 Poverty duration in Canada: percentage of low-income spells lasting five years or longer, 2011–2018 (Source Statistics Canada. Table 11-10-0026-01 Low income duration of tax filers in Canada. https://doi.org/10.25318/111 0002601-eng)

Halifax, Trois-Riverières, Winnipeg, Sherbrooke, and Regina, which have higher shares (22% or more) of people living in poverty for more than five years. The gender gap in these cities is greatest in Sherbrooke and Regina. The gender gap in the share of people with low incomes varies. In some cities there are more low-income females than males, while in other cities there are more males than females (Fig. 4.3). Comparing these results with the data on poverty duration presents a puzzle. The female-male poverty gap is positive in Toronto, Vancouver, Edmonton, and Calgary. Yet the female-male poverty duration gap is negative for Edmonton and Calgary and medium–high for Toronto and Vancouver (Fig. 4.2). The data for Toronto and Vancouver seem more consistent, but in the two large Alberta cities, gender poverty gap and duration data seem to be at odds: the female-male poverty gap is slightly higher than other cities, but

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16

2.5

14

2 1.5

12

1 10 0.5 8 0 6 -0.5 4

-1

2

-1.5

0 Toronto, Ontario

Vancouver, Edmonton, British Alberta Columbia

Calgary, Alberta

OttawaGatineau, Ontario/Qu ebec

-2 Québec, Quebec

Winnipeg, Manitoba

Montréal, Quebec

Male

12.3

9.6

9.9

5.6

8.7

8.2

11.9

11

Female

14.4

11.7

10.4

5.8

7.8

7.2

10.6

9.5

Gap

2.1

2.1

0.5

0.2

-0.9

-1

-1.3

-1.5

Male

Female

Gap

Fig. 4.3 Gendered poverty in select cities: percentage of persons with low income, market basket measure, 2018 base (Source Statistics Canada. Table 1110-0135-01 Low income statistics by age, sex and economic family type. https:// doi.org/10.25318/1110013501-eng)

the female-male duration gap is lower than the other cities. This suggests that the Alberta gender poverty gap is more severe than other cities but that the poverty duration gap is more favorable. Alan Walks (2016) has compiled an important dataset including a variety of income and asset indicators from public and private sources, organized by city and by census tract (Table 4.1). This allows for many interesting insights about inter- and intra-urban poverty. Walks found that it is in asset holding, as compared to income, that inequality is particularly pronounced (Walks, 2016, p. 766). Generalizations from these data are limited but it appears that income inequality is higher in the larger cities and lower for smaller centers. In terms of financial asset holding, Toronto and London, two important financial centers in Canada, demonstrate the greatest inequality. Walks calculated “total marketable wealth” by combining financial assets, real estate, and debts, finding that the large

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Table 4.1 Intra-city inequality as measured by total marketable wealth and annual disposable income, ranked by Gini coefficient Total marketable wealth Higher Middle Lower

Gini coefficient

Halifax Calgary

Annual disposable income Gini coefficient

0.440

1= greatest inequality; 25 smallest inequality 1

0.283

1 = greatest inequality; 25 smallest inequality 1

0.436

2

0.224

2

London

0.433

3

0.201

6

Winnipeg

0.432

4

0.206

5

Toronto

0.429

5

0.216

3

Montréal

0.429

6

0.199

7

Vancouver

0.402

8

0.187

10

Edmonton

0.384

10

0.134

25

Victoria

0.371

12

0.175

13

Ottawa

0.369

13

0.192

8

Regina

0.351

15

0.176

12

Saskatoon

0.333

16

0.173

16

Québec City

0.324

17

0.160

19

Sherbrooke

0.316

19

0.153

22

St. John’s

0.290

23

0.138

23

Oshawa

0.269

25

0.137

24

Source Walks (2016, p. 769, Table 3)

centers of Calgary, London, and Winnipeg are the most unequal, while small centers like Saskatoon, St. John’s, and Oshawa are the least unequal. Urban poverty is a major challenge in Canada, and the fact that it is not distributed evenly or in a clear pattern across the country adds to the challenge. The largest cities—Toronto, Vancouver, and Montréal—have the largest absolute numbers of low-income residents and some of the largest shares with respect to their total population, but Winnipeg is also among the top cities on that count. Of the big three, only Vancouver ranks among the cities with the longest episodes of people living on low incomes. Halifax, Trois-Rivières, and Winnipeg also suffer this achievement. In terms of gender gap in poverty rates among cities, the gap is

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largest in Toronto and Vancouver and lowest in Winnipeg and Montréal. Finally, intra-city inequality is highest when measuring by wealth, not income, and is greatest in Halifax, Calgary, London, and Winnipeg, and lowest in smaller communities scattered around the country. Generally, people with low incomes in the bigger cities struggle more but not always; in smaller communities they fare better, but not always. Is it easier to “fall through the cracks” in a large city, while more likely to be supported by social capital in a small community? Or is there more poverty in larger urban centers because people with low incomes migrate to the city in search of opportunity? These data do not cast light on this issue. But the results do underscore the need for cities to actively address poverty and inequality if community and individual financial well-being is to be served better. Welfare Support Some of the poorest Canadians are fully unemployed and rely on welfare assistance to make ends meet. But welfare supports, including federal and provincial, in Canada fall far below the poverty line. And since welfare provision comes under provincial jurisdiction, these supports vary from province to province. Jennifer Laidley and Hannah Aldridge (2020) examined welfare supports by province and then compared these rates with Canada’s official poverty line. Welfare rates and the official poverty line that reflects different costs vary across provinces. Generally, Laidley and Aldridge’s analysis showed that Québec supports came closest to the poverty threshold, while they were often the least adequate in Nova Scotia. In fact, welfare support falls below—in many cases, substantially below—the poverty threshold in most provinces (Laidley & Aldridge, 2020, p. 15). Support to single persons and single persons with a disability came between 28 and 68% below the poverty threshold. Things were modestly better for families, falling somewhere between 8 and 43% below the threshold. Finally, in just over half of the jurisdiction categories studied, welfare rates did not keep up with inflation between 2018 and 2019 (Laidley & Aldridge, 2020, p. 12). Government supports that are dependent on lifetime personal contributions, like the Canada Pension Plan (CPP) and Employment Insurance (EI), present a different type of barrier, particularly for newcomer Canadians. Koning and Bating (2013) note that while newcomer Canadians (except for temporary workers) do not experience direct exclusion from

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welfare programs, they do experience indirect exclusion from these programs. Since CPP and EI are funded by lifelong contributions, newcomer Canadians will receive lower levels of support from these programs than longtime contributors do. Relying on social assistance and being a newcomer Canadian increases the odds that one will have a low income. Box 4.3 The Insufficiency of Social Welfare Many of the Financial Diaries participants relied on Manitoba welfare support to make ends meet. The welfare support rates were well below the poverty line, and people had to struggle to afford the basics. We found that that people with low-income work very hard to manage their finances. They endeavor to control their finances so that, as one participant said, their finances don’t control them. They must prioritize needs and wants because there is not enough for both. One participant talked about her goal of having a “little bit more” than her needs so that there would be a little extra for savings or small purchases or trips (Buckland & Wilson, 2021).

Unemployed parents and elders fare slightly better than do other people who are unemployed. But since welfare rates are well below the official poverty line, relying on welfare requires people to work some magic with their finances. It means that food banks, peer lending, house surfing, and public transportation (if affordable) are common parts of life. Choosing this type of lifestyle is one thing, but welfare rates are not such that people are well placed to improve their education, ability to get into the workforce, or open a business. The consequences are very hard on people’s financial well-being. Community Financing and Economy The informal economy is an important part of the inner-city economy. The informal economy is socially based and non- or under-monetized. Collective barn building and lending a family member $20 are classic examples of the informal economy, but it can encompass much more. Contemporary informal economic and financial activities have ancient roots, organically growing first out of settled agriculture and then from urbanization. Ever-denser settlement led to the rise of entire economic segments of manufacturers, retailers, and financiers, who before the

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advent of regulations and state control were informally structured. Informal economies are perhaps most obvious in poorer areas in the Global North and in large swaths of the economies of poor countries in the Global South. The study of informal economies is more common in the Global South; there are relatively few such studies for Global North countries such as Canada (Jensen et al., 2019).4 Definitions of the informal economy vary considerably. In some cases, it is more narrowly limited to things such as household activities, collective and voluntary action, or illegal or quasi-illegal activities (e.g., the market for illegal substances). In other cases, the informal economy has been defined more comprehensively to encompass all these activities and any others that fall outside the formal and state-regulated economy. Jensen et al. (2019) identify different perspectives on the informal economy: the structuralist or exclusion perspective sees it as a residual of the formal sector, and the post-structuralist or exit perspective sees it as the result of voluntary participation (p. 277).5 According to Jensen et al., the informal economy is quite large in the United States: two-thirds of US families have one member engaged in informal activities, and these activities are highly diverse (e.g., from food production through providing blood to clerical work (p. 279). Among 27 European Union nations, the informal economy is larger where inequality is higher and social protection is lower: “Informal work increases with southern and eastern location and with lower levels of social protection and greater inequality” (Williams, 2014; cited in Jensen et al., 2019, p. 277). Finally, Jensen et al. found that low-income households were far more likely to respond affirmatively to the question, “Has there ever been a time when this kind of informal work made the difference between making ends meet and really not getting by?” (Jensen et al., 2019, p. 281).

4 Henry and Sills (2006) identify sources of the study on the informal economy to include ethnographic studies of unemployed and low-income people, studies of the household economy, and the study of illegal economic activities (p. 265). They argue that the informal economy co-exists with the formal economy in a “dynamic dialectical” relationship, in part organized around “the remnants of a [much older] communal order” (p. 280). 5 Jensen et al. (2019) argue that survey results support the exclusion thesis rather than the exit thesis: “there is little support for the notion that ‘exit’ or desire to avoid the restrictions of a regulated economy is a major motivation for informal economic activity” (p. 280).

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One of the commodities that informal economies supply is credit. And informal credit has ancient roots, with some arguing that credit, not the bartering system, is the foundation of money (Graeber, 2014). Dermineur (2019) undertook a fascinating study of peer lending in France in the eighteenth century and found that peer-based lending was far more common than has been generally understood. At that time, “notarial” credit was the formal credit. But Dermineur found that informal credit was an important element of the local economies of the day. Informal and peer-based credit “functioned in a hermetic circle wherein habitants of the same village, belonging to the same professional category, exchanged both money in cash and goods in the form of deferred payments. The debts they incurred helped to smooth consumption and palliate the lack of cash within the community, but they also helped to make investments. Some lenders were more prominent than others, although no one really dominated the non-notarised market” (p. 387). Box 4.4 Peer-to-Peer Lending and Gifting Many Financial Diaries participants regularly loaned and borrowed through these types of non-hierarchical, informal networks. Only one participant engaged in what could be seen as a hierarchical credit system.6 In some cases, participants referred to these transactions as loans and in other cases they referred to them as gifts. Virtually all participants who received loans also gave them. Some participants seemed to receive more than they gave, and some, the other way around. Income level did not necessarily determine whether one was a net lender or borrower, as some very low-income participants regularly loaned money to children. It was very poor mothers and grandmothers who seemed to be the most common net lenders. Frida was very supportive of family and friends. She would spend more than she could afford to have people over for a meal. For Frida, providing and sharing meals with others was a part of her identity. She understood and accepted that she was sharing more than she had. “Yes, it’s part of my identity. Yeah, that’s it. Yeah and it gets me friends too. Some friends come around, ‘Oh, I want to try that. I want to try that…’ So, most times when I cook it’s because I’m having people over. But that’s what makes me happy. That’s what makes me interested in wanting to cook. So, I’m okay with, I’m good living that way here.” Another participant, newcomer Eniola, who was one of the best-off income-wise, was extremely generous in sending money home to her

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family, lending money to local friends, and making substantial donations to her church. Tyler also talked about caring for his friends through his financial decisions. He talked about going back to school and how doing so would benefit others through the notion of social capital: “But [my further education is] going to be a useful skill for other people in my social network as well. I don’t just want this for myself. It’s an idea of also giving back to the community, to my family members.” He saw a win–win relationship in improving his education and abilities because this would benefit him and his friends (Buckland & Wilson, 2021).

Who is active in the informal economy? Gunter (2017), analyzing survey data on the informal economy in the United States, finds engagement across the population but that younger, less-educated individuals and those who rely on social welfare programs are more likely involved with the informal economy (p. 28). Men are likely to work in the formal and informal sectors simultaneously, and women are as likely to do that or only in the informal economy (p. 28). And people transition in and out of the informal economy. Gunter estimates the size of the informal economy is valued at 0.5% of GDP, but others argue it is larger, perhaps 7%–10% of GDP (Schneider, 2005; cited in Gunter, 2017, p. 29). What about the connection of gender and race to the informal sector? Hoyman (1987), examining women’s engagement with the informal economy in the United States, finds that women are at least as active as men, and in some sectors (childcare) more than men. But, she argues, connection to the informal economy may expose women to exploitation (p. 82). Race and gender are found to play an important role in participation in the informal economy, and Thukral (2010), also focused on the United States, points out that the informal economy can be low-waged and exploitative, particularly for domestic and sex workers (p. 69). Among the few recent studies of the informal economy in Canada is Reimer’s (2006) examination of the informal economy in rural Canada. Reimer defines the informal economy as comprising those activities that involve economic outcomes (production, consumption, etc.) but that are not regulated and not recorded by a state agency. Reimer observes 6 This was Kateryna, who was not paid a wage for her work but told to ask for money when she needed it. Whether this money was payment or a loan is unclear.

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that participation in the informal economy can “reduce the insecurity and risk that many people and households face” (Reimer, 2006, p. 27). This is particularly the case for part-time workers who experience stress and anxiety about their livelihoods and income. And, Reimer notes, this anxiety is exacerbated by the stigma associated with unemployment, a real risk the precariously employed person faces. An important feature of the informal economy is social capital, including norms of reciprocity and support. Reimer argues that social capital is an important feature of a well-functioning informal economy and he estimates that 90% of the population is involved in the informal economy in some fashion (Reimer, 2006, p. 39). Participation in the informal economy rises when moving from the lowest to the middle-income level and then declines after that. But the unemployed and partly employed are more active in the informal economy than the fully employed, and women are far more engaged in it than men (Reimer, 2006, p. 40). Banking is a service that virtually every Canadian needs. And a range of basic services, including a transaction account, savings account, and credit (card), along with a way to access these and get information about these, is critical. Many people with low incomes have only partial access to banking or none at all and instead rely on peer lending and granting circles. While these options might work well, they are certainly not a replacement for mainstream banking. The need to rely on informal finances helps to explain why people with low incomes have poor finances.

Housing, Retail, Food Security, and Health Other issues that are important to consider with respect to urban modestincome neighborhoods relate to housing, retail, food security, and health. As discussed below, dynamic changes are occurring in these neighborhoods with respect to housing, in some cases declining and in other cases gentrifying. The retail sector in modest-income urban locales can be an important source for goods and services as well as employment. Food security and health outcomes are critically important issues affecting quality of life. Housing The post-World War II period saw a widespread movement of people from the inner city (and rural areas) into the emerging suburbs. This has

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been a widespread phenomenon in Anglo-American nations, including Canada. Rural-to-urban migration continued from the early industrial revolution, urban populations grew, the automobile and public transit enabled people to live farther from the city center. Moreover, tastes changed, leading people to the prefer larger lots found in the suburbs. The movement of middle-income people to the suburbs and later to the exburbs led to a decline in the inner city, so that in many Canadian cities it became the destination of people with the fewest options. The quality and quantity of housing, shopping, and employment opportunities in the inner city reflected this change. Relative growth and decline between the suburbs and the inner city grew over time, leading to long-term innercity deterioration through what Myrdal labeled “circular and cumulative” decline (Myrdal, 1957; cited in Whysall, 1995). However, the process was not universal and it was reversible. In some places, notably in Europe, inner cities did not experience the same post-World War II decline as those in North America did. Since the 1990s, gentrification has reversed some of the declining wealth of the inner city. A process of economic improvement in older and lower-income neighborhoods, gentrification is driven by improvements for some inner-city neighborhoods in accessing the city center— through mass transit corridors—and by changing preferences away from the suburban to the city lifestyle. Gentrification has a mixed effect on local economies in that the movement into the neighborhood by middle-income people can make housing too expensive for low-income households. Several studies have pointed out that a consequence of this shift is a trend in which affordable housing has tended to move over time from the inner city to the suburbs and away from rapid transit catchments (for both inner city and suburb) (Ades et al., 2016; Bunting et al., 2004; Revington & Townsend, 2016).6 This pushes people with low and modest incomes to less accessible places of employment, food, and health care (Ades et al., 2016, pp. 23–24). In Canada, this process has been documented in Montréal and Vancouver by Revington and Townsend (2016), while Hulchanski (2007) has recorded the gentrification of Toronto’s inner city, close to rapid 6 Studies in Australia have observed similar results. For example, for Sydney from 1986 to 2006, Randolph and Tice (2014) note “marked suburbanization of the locations of disadvantage away from the ‘traditional’ inner cities and into the middle, and in some cases outer, suburbs” (p. 384).

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transit. Ades et al. (2016) note that a consequence of inner-city gentrification is suburban impoverishment. And this usually leads older suburban neighborhoods to experience declining income, particularly in locations with high-rise rental accommodation (p. 34). This impoverishing of certain suburbs is primarily seen in Canada’s super cities—Toronto, Vancouver, and Montréal—where population, economic growth, and massive transportation investment have led to substantial gentrification processes in their respective inner cities (Allen & Farber, 2020, p. 4). Smaller cities such as Edmonton, Regina, and Winnipeg may still experience the classic inner-city phenomena. An important driver of these changes is choice of household location, and an important factor influencing that choice is access to transportation.7 The suburbs are relatively rich in roads and poor in public transportation. The reverse is the case for the inner city. As cities have invested in public transportation, better-off families have become more interested in moving to inner-city neighborhoods along transit corridors. But Allen and Farber (2020) maintain that this process has not changed the fact that inner-city Toronto still houses many people of low income. People with low incomes choose inner-city transit hubs because without a car, they rely more on public transportation. Non-poor households are more likely to own a car and prefer the suburbs. It is the non-poor without a car who tend to live near inner-city transit hubs. Box 4.5 Living in the Inner City versus Downtown Most of the Financial Diaries participants did not own a vehicle and lived in the inner city. The exceptions were the few who were fully employed and one or two others. Winnipeg is a mid-sized city with an extensive bus system, so getting around was not too difficult without a car. It was, however, expensive in relation to the incomes received from social assistance or part-time casual employment. Housing is more affordable in inner-city neighborhoods such as the North End, but it means that access

7 Florida and Adler (2018) found a “patchwork” of better-off neighborhoods that

center around several factors including proximity to the urban core, closeness to knowledge institutions, proximity to transit, and clustering around natural amenities (e.g., waterfronts) (pp. 620–622): “The less advantaged classes are then shunted into the spaces leftover or in between—either traditionally disadvantaged areas of the inner city or the far fringes of the suburban and exurban periphery” (p. 622).

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to services is more limited. Living in the suburbs or downtown is more expensive but also more convenient for accessing certain services. Consider Mary and Kateryna: Mary was based downtown, close to many banks, while Kateryna lived in the North End where there were few banking locations. Banking was a major challenge for Kateryna, who had to commute downtown to get to her bank. Mary’s bank was within walking distance. The difference in physical distance Mary and Kateryna were required to travel was reflected in the quality of services they received. Mary was able to easily get to her bank and use its telephone service to get updated information about her account. Kateryna was told she could no longer use her bank passbook and was only offered a regular statement as an alternative, which she would have to pay for.

But how does gentrification affect residents with low-income? Does it contribute to their lives or diminish them? Lees (2008) identifies ways in which gentrification might benefit low-income residents: • The “defending the neighborhood” argument: middle-income people are better able to advocate for the neighborhood. • The “money-go-round” argument: mixing middle-income households into a neighborhood will increase its local economy and boost retail, employment, etc. • The “networks and contacts” argument of Robert Putnam: mixed neighborhoods will generate networks across economic groups (Lees, 2008, p. 2451). But, Lees argues, based on a review of studies from the UK, the United States, and the Netherlands, the evidence that gentrification has a positive outcome for society and disadvantaged people living in the inner city is weak. Gentrification as a “development strategy” addresses the symptom, not the cause of neighborhood poverty: “Efforts to improve social equity would be more effective if directed towards people themselves rather than moving people around to mix neighbourhoods” (Lees, 2008, p. 2463). The gentrification argument is like the trickle-down theory that argues to first help the rich, who will then, in turn, help those with lower incomes by hiring them and purchasing things they produce. Both theories are limited because the links between these two groups may be quite weak.

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In the case of Montréal, Toronto, and Vancouver, Lees draws on Walks and Maaranen (2008) to note that “gentrification in these cities was followed by declining, rather than improving, levels of social mix, ethnic diversity and immigrant concentration within affected neighbourhoods” (Lees, 2008, p. 2457). Middle-class gentrifiers tend to socialize with other middle-class residents; their social and economic situation is secured by building connections with other middle-income people and institutions, including retailers and employers (p. 2458). But low-income residents within the gentrifying locale face rising housing prices and pressures to exit. Lees concludes that “over the longer-term poor people suffer more from the loss of benefits of living in a poor neighbourhood than they gain from living in a more affluent one” (p. 2463). Kang (2021) explores a particularly negative consequence of gentrification. As middle-income people move into a neighborhood, this creates home instability, leading to frequent moving by people with low incomes (“churning”) and homelessness (Kang, 2021, p. 80). Kang concludes that housing instability is more acute in American regions where poverty is more pervasive and aggravated for families that do not have a vehicle in a region with limited public transportation (p. 97). “The results reveal that low-income renter households are likely to experience housing instability in metropolitan areas where the poverty rate and the degree of automobile dependency are high. Notably, low-income renter households are placed at a heightened risk of housing instability when they have no private vehicle and reside in highly automobile-dependent metropolitan areas” (p. 80). Box 4.6 The High Cost of Housing Housing was a very important issue for most diary participants and their largest single expenditure. Participants’ housing ranged from owning a home through renting an apartment or living in a supportive living situation to—for one participant—near homelessness. On average, participants devoted a large amount of their income—30%—to housing and utilities. The share of income spent on housing and utilities dropped with income, so that those with relatively higher incomes spent a smaller share of their income on it. The Pearson correlation coefficient was 44.2%, meaning a moderate positive correction between total spending and spending on housing: a $1 increase in income was associated with a $0.442 increase in spending on housing and utilities.

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The argument that gentrification indirectly uplifts urban residents with low and modest incomes may have some validity in certain circumstances. However, a more direct way to address urban poverty is to improve the ability of people with low incomes to gain employment, increase income, gain improved housing, and access safe, quality, and well-priced banking and retailing. Retail Decline Common features of inner-city retail are its small scale and prices that are relatively higher than those of a large suburban competitor. The quality of goods such as produce might be lower than elsewhere. The lower quality and higher prices have a lot to do with the lower volumes of sales, requiring retailers to charge higher per-unit prices to cover costs. There may be cases of local monopoly, and if not monopoly, an asymmetric power relationship between retailer and consumer, particularly if residents are unable to go elsewhere. In some cases, these situations can lead to vulnerable consumers being exploited. Yet it is the inner city that Porter (1995) claims has terrific potential for retail resurgence because of its strategic location between downtown and suburb, its untapped market demand, and its labor surplus. Timothy Dixon argues that expanding the supply of retail space in the inner city is a means to promote local development, concludes more research is needed, and notes that “the decline of the manufacturing sector in the UK, and the long-term trend towards a service sector economy, has also led policy makers … to champion the importance of retailing as a potential creator of jobs, and economic vitality, not only nationally, but more locally in local regeneration projects, especially in disadvantaged, inner city areas” (Dixon, 2005, p. 171). For instance, Whysall, who has studied the inner-city retail sector in Nottingham, UK, argues that community decline is associated with declining retail, a process he calls “commercial blight” (Whysall, 2011). The results of retail decline include an increasing number of vacant buildings, loss of anchor retailers, a declining number of shoppers, deteriorating physical environment, and a growing (perception) of lack of safety (Whysall, 2011, p. 4). This leads to reduced quality and diversity in retail offerings and rising prices, which hurt people with low incomes the most because they are the least mobile. Commercial blight can lead to the creation of “food deserts” (discussed below), driving food insecurity. Retail decline also harms local employment creation. Whysall notes

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that as retail centers have grown and become more remote, middleincome people with higher mobility are able to take advantage of these centers and their lower prices, resulting in “the paradox of lower income groups with greater needs for low prices being increasingly less able to access those lower prices, as retailing has decentralized to locations more suited to car access” (Whysall, 2011, p. 6). The consequences of commercial blight are economic (oversupply of local buildings), frictional (traffic congestion, falling land values, crime), functional (oversupply of older buildings no longer suitable), and physical (poorly maintained buildings) impoverishment (Whysall, 2011, p. 14). Box 4.7 The Challenges of Business Creation in the Inner City Retail improvement, sometimes included within a community development framework or, more organically, a gentrification process, might involve business attraction or “home-grown” business development. Various types of microcredit, micro-enterprise, and asset-building programs seek to stimulate the latter. The creation of Neechi Commons in inner-city Winnipeg in 2013 is one such example. Neechi Commons was a grocery store and restaurant located in a very modest-income neighborhood on a major transportation artery (Main St.). It was operated as a co-op, had strong Indigenous community involvement, and was supported financially by a large local credit union. Unfortunately, for various reason, the store closed its doors in 2018. In part it faced a challenge of low sales volumes, which some attributed to the relatively higher prices for goods there as compared with non-local large grocery stores. Some neighborhood residents preferred to travel to a larger store in another part of town to get lower prices. In fact, one nonprofit in the area began a bus shuttle service to assist residents get their groceries. The decision of where to go was left up to the participants, and they chose to go further afield to get their food for lower prices.

The business attraction strategy tends to involve attracting retailers with a relatively larger footprint. In Canada, various discount “dollar” stores are found such as the North West Company’s Giant Tiger retail company. These stores bring modest quality goods with relatively lower prices. But they can undermine other local retailers. Whysall (1995) examined the introduction of a large UK-based store, Asda, into inner-urban Nottingham and found that the new “superstore” competed with local businesses: “Rather than regeneration having been stimulated by positive

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spin-offs from the superstore, in this scenario any benefits have arisen as a result of the traditional traders innovating to compensate for the negative impacts of the superstore on their trade. Such traders would not see this as regeneration but as a strategy for survival. Nor can all aspects of the adaptation be seen as progressive” (p. 11). There are strengths and weaknesses in virtually all market improvement strategies for neighborhoods with low-income residents. However, these improvements are necessary for these communities to thrive and for residents to experience improved financial well-being. If the goal is to increase jobs and access to quality and affordable products and services, then it might involve a combination of growing local businesses and attracting some others from outside. By so doing—raising local employment and improving local markets—residents’ limited finances will go further, enabling them to experience improved financial well-being. Food and Health Security As mentioned above, inner-city economies are sometimes called “food deserts” because of their lack of good-quality, diverse, and low-priced food. Related to this is food insecurity—a state of insufficient food or the wrong combination of food groups. Conversely, food security is a condition where people have adequate quantity and quality of food to meet their physical needs. In Winnipeg, a local co-op food retailer sought to address the lack of supply in the inner city but could not meet the volume requirements to cover its costs (Box 4.7). With some exceptions, it is the big box discount retailers that do best in the inner city. They bring lower prices, but food quality and diversity are weak. There is a lot of evidence that people with low incomes suffer from weaker food security and this affects other aspects of health. In their study, Godrich et al. (2019) found that Canadian children from food-insecure homes, as compared to those from food-secure homes, “were more likely to have low global self-esteem and low self-efficacy for healthy lifestyle choices. These associations were generally more pronounced for girls than for boys” (p. 7). Food insecurity is a problem for adults with low incomes, but it improves for many low-income Canadians once they turn 65 years old and can access various government programs, such as the Canada Pension Plan (Pirrie et al., 2020). But is food insecurity a problem of a lack of local supply, or a lack of (income-driven) demand? In their study, Fan et al. (2018) investigate

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the food desert phenomenon in the United States and find a 3.5% difference in price index between low- and high-access tracts, with race and education as important factors leading to higher and lower prices, respectively (p. 593). They conclude that living in a food desert will moderately affect one’s food security in a negative way and point to other factors, such as income, as being more important. Allcott et al. (2019) agree with this analysis. Their study aims to understand how significant the supply side of food retail is in fostering poor nutritional outcomes for low-income Americans. While they do not refute the food desert argument that modest-income neighborhoods have poor retail food supply, they maintain that the supply side is not the most important factor: “Policies aimed at eliminating food deserts likely generate little progress toward a goal of reducing nutritional inequality” (Allcott et al., 2019, p. 1840). Instead, price is a critical factor in diet formation. Families in the bottomincome quartile are willing to pay $0.43 per 1,000 calories, while families in the top-income quartile are willing to pay almost three times as much, at $1.14 per 1,000 calories (Allcott et al., 2019, p. 1797). They also find that education, including nutrition education, is an important factor driving diet choice. Cidro et al. (2015) examine the concept of the cultural-material food desert in Winnipeg for Indigenous people. Indicators of food insecurity find that Indigenous people face much higher rates than do non-Indigenous people (33% vs. 9%) (p. 27), and that this might be caused by inaccessibility and/or price. But rather than focusing exclusively on access to and prices paid for food, Cidro et al. consider food to be interconnected with culture. Food consumption ties people to nature, facilitates sharing and caring for dependents through promoting nutrition, providing medicines, and passing knowledge to younger generations (Cidro et al., 2015, p. 27). From an Indigenous perspective, growing, harvesting, preparing, eating, and sharing food is a form of ceremony and therefore deeply imbedded in culture and spirituality (p. 34). They call for policies that enable Indigenous food sovereignty by recognizing food’s connection with culture and spirituality and by fostering participation in, and control of, the food system (p. 37).

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Box 4.8 The High Cost of Food Insecurity Food was another top expenditure item for Financial Diaries participants, who on average spent just under 19% of their income on food. Some participants were very careful with food spending, including minimizing expenditure on prepared meals and relying on food banks and meals from family members. Nine diary participants received food from a food bank. Mary, for one, visited her food bank twice a month and, based on the six months that she had relied on it, valued what she received at $82 per month. Other participants were like Namid who regularly counted on eating meals at his mother’s home. Over the four months he participated in the Financial Diaries, he valued the meals he received at $102 per month. Other participants spent a substantial amount on prepared and fast food, up to one-third of their budgets. Amy, who regularly visited coffee shops and fast-food restaurants, spent 25% of her income on food; Jacquelyn did not cook a lot and instead relied on fast food and food banks.

The rise of the social determinants of health concept has highlighted the connection between poverty and ill health. Glenn and Nykiforuk (2020) argue that financial strain is “socially patterned” and that people, more often racialized people and women, who experience chronic or severe persistent illness often also report facing financial strain (p. 985). The COVID-19 pandemic and economic recession have aggravated this tension and are associated with negative health outcomes, including anxiety, depression, and other mental and physical expressions of ill health (Glenn & Nykiforuk, 2020, p. 985). They note that low-income Canadians are more at risk of job loss and negative health consequences from the pandemic. Raphael et al. (2019) agree, stating that it is the lowest income quintile of Canadians who “experience a greater likelihood of adverse health outcomes for virtually every physical, mental, and social affliction” (pp. 1027–1028). Box 4.9 The High Impact of the COVID-19 Pandemic The Financial Diaries project completed a follow-up survey in the summer of 2020, six months after the last participant graduated and right after the first wave of the COVID-19 pandemic. The pandemic had taken a toll on most of the 19 participants who participated in this survey, both economically and mentally. The economic recession hit the respondents hard. Some were able to continue to work, some found their work reduced,

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and some had completely stopped working. For those who received the Canada Emergency Response Benefit (CERB), their financial situation was good. Since most of these individuals earned a modest income before the pandemic they found that the CERB monthly allowance was reasonable. It was different, however, for the unemployed group, who did not meet the requirements for emergency benefit. They faced the same higher costs as the employed group—family members returning to live at home, higher transportation costs to take a taxi instead of the bus, and higher grocery costs from shopping at a more conveniently located store rather than a store requiring transportation—but their income was unchanged. Virtually all participants noted the emotional challenges they faced because of the pandemic. Isolation and fear were common experiences, and some participants struggled with more acute mental health issues. One participant reported that she could no longer work because of the mental strain she faced. Several participants noted higher spending to deal with the mental strain they faced, including spending on cigarettes and comfort food. One participant observed, “Finances have made me stressed. COVID also stresses me out. It has taken a huge toll on my health and well-being. I want to be mentally stable and not stressed out” (Dueck-Read, 2021).

Using a conceptual map of the social determinants of health, Kumanyika (2019) examines the experience of racialized groups with obesity in several countries from the Global North. She notes that the higher prevalence of obesity in Indigenous and minority populations is connected to inequality. Various processes, such as social stratification and residential segregation, lead Indigenous and minority communities to experience more stress, and that stress is “directly associated with obesity-related risks through effects on body fat distribution and associated metabolic disturbances, sleep disturbances, the effects of stress in increasing the desire to eat, and consumption of high-fat or high-sugar foods to cope with stress” (Kumanyika, 2019, pp. 130–131). On the issue of mental well-being, Schill et al. (2019) investigated a group of Indigenous Elders’ views about mental well-being, which pointed to a holistic notion that included spiritual, physical, and mental dimensions. For Indigenous people, moving to the city can have negative mental health consequences because of resulting feelings of isolation and a greater difficulty in engaging in traditional land-based activities

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(Schill et al., 2019, p. 873). Furthermore, Indigenous people will sometime avoid using mainstream health systems because they associate it with systemic racism. Food security and health are important correlates with financial wellbeing. Having good food and health can enable a person to improve their finances, and having good finances can enable a person to improve their food security and health outcomes. Neighborhoods with low average incomes might be food deserts, but if employment, income, and opportunities for residents grow, then they will be able to go elsewhere to purchase food, or their rising demand will stimulate the local economy.

Conclusion This chapter has explored social and economic features of low- and modest-income neighborhoods in Canada’s cities. Particularly in Canada’s largest cities, there is a movement of poverty from accessible locations in the inner city to less accessible parts of the inner suburbs. Not all lowand modest-income people live in these neighborhoods, but many do. And these communities tend to be richer in race and ethnic identity as compared to other communities. As such, pressures arising from class, race, and gender bias can operate in a multiplicative way on residents. Local economies in these neighborhoods tend to be weaker, with higher rates of unemployment, underemployment, and reliance on sub-povertylevel welfare supports. But informal economic activity counters some of these deficits. Housing for residents faces pressures from both gentrification, which might push residents out, and impoverishment, which might further harm residents who must live in sub-standard housing. Retail spaces, food security, and health-care supports for residents are often all insufficient in modest-income neighborhoods. To understand the lived reality of financial vulnerability, Chapters 3 and 4 have focused on the individual, household, and community levels, drawing on insights and examples from the Canadian Financial Diaries research project. The next chapter will continue an exploration of the micro-level experience of financial vulnerability but will do so from a macro-perspective, using national-level indicators and data.

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Works Cited Ades, J., Apparicio, P., & Séguin, A.-M. (2016). Is poverty concentration expanding to the suburbs? Analyzing the intra-metropolitan poverty distribution and its change in Montreal, Toronto and Vancouver. Canadian Journal of Regional Science, 39(1–3), 23–37. Allcott, H., Diamond, R., Dubé, J.-P., Handbury, J., Rahkovsky, I., & Schnell, M. (2019). Food deserts and the causes of nutritional inequality. Quarterly Journal of Economics, 134(4), 1793–1844. https://doi.org/10.1093/qje/ qjz015 Allen, J., & Farber, S. (2020). Planning transport for social inclusion: An accessibility-activity participation approach. Transportation Research: Part D: Transport and Environment, 78. https://doi.org/10.1016/j.trd.2019. 102212 Buckland, J., & Wilson, L. (2021). Control, sufficiency, and social support: Lessons from Low-income Canadians about Financial Wellbeing (Working Paper). Winnipeg: Canadian Financial Diaries Research Project. Bunting, T., Walks, R. A., & Filion, P. (2004). The uneven geography of housing affordability stress in Canadian metropolitan areas. Housing Studies, 19(3), 361–393. Cabaniss, E. R., & Fuller, J. E. (2005). Ethnicity, race and poverty among single women: A theoretical synthesis. Race, Gender and Class, 12(2), 142–162. Chokie, M., & Partridge, M. D. (2008). Low-income dynamics in Canadian communities: A place-based approach. Growth and Change, 39(2), 313–340. Cidro, J., Adekunle, B., Peters, E., & Martens, T. (2015). Beyond food security: Understanding access to cultural food for urban Indigenous people in Winnipeg as indigenous food sovereignty. Canadian Journal of Urban Research, 24(1), 24–43. Coleman, J. (1998). Foundations of social theory. Harvard University Press. Dermineur, E. M. (2019). Peer-to-peer lending in pre-industrial France. Financial History Review, 26(3), 359–388. Dixon, T. J. (2005). The role of retailing in urban regeneration. Local Economy, 20(2), 168–182. Dueck-Read, J. (2021). The differential impact of the pandemic and recession on family finances: Report on COVID-19 follow-up survey with Phase One participants. Winnipeg: Canadian Financial Diaries Research Project. https://financ ialdiariesca.files.wordpress.com/2021/01/cfd-covid-19-survey-final.pdf Fan, L., Baylis, K., Gundersen, C., & Ver Ploeg, M. (2018). Does a nutritious diet cost more in food deserts? Agricultural Economics, 49(5), 587–597. Florida, R., & Adler, P. (2018). The patchwork metropolis: The morphology of the divided postindustrial city. Journal of Urban Affairs, 40(5), 609–624. Ghorayshi, P. (2010). Diversity and interculturalism: Learning from Winnipeg’s inner city. Canadian Journal of Urban Research, 19(1), 89–104.

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Glenn, N. M., & Nykiforuk, C. I. J. (2020). The time is now for public health to lead the way on addressing financial strain in Canada. Canadian Journal of Public Health/Revue canadienne de santé publique, 111(6), 984–987. https:// doi.org/10.17269/s41997-020-00430-2 Godrich, S. L., Loewen, O. K., Blanchet, R., Willows, N., & Veugelers, P. (2019). Canadian children from food insecure households experience low selfesteem and self-efficacy for healthy lifestyle choices. Nutrients, 11(3), 675. https://doi.org/10.3390/nu11030675 Graeber, D. (2014). Debt: The first 5,000 years. Melville House. Gunter, S. R. (2017). Dynamics of urban informal labor supply in the united states. Social Science Quarterly, 98(1), 16–36. Henry, S., & Sills, S. (2006). Informal economic activity: Early thinking, conceptual shifts, continuing patterns and persistent issues—A Michigan study. Crime, Law and Social Change, 45(4–5), 263–284. Hoyman, M. (1987). Female participation in the informal economy: A neglected issue. Annals of the American Academy of Political and Social Science, 493, 64–82. Hulchanski, D. (2007). The three cities in Toronto: Income polarization among Toronto’s Neighbourhoods, 1970–2000 (Research Bulletin 41). Toronto: Centre for Urban and Community Studies, University of Toronto. Jensen, L., Tickamyer, A. R., & Slack, T. (2019). Rural-urban variation in informal work activities in the United States. Journal of Rural Studies, 68, 276–284. Kang, S. (2021). Beyond households: Regional determinants of housing instability among low-income renters in the United States. Housing Studies, 36(1), 80–109. Koning, E. A., & Banting, K. G. (2013). Inequality below the surface: Reviewing immigrants’ access to and utilization of five Canadian welfare programs. Canadian Public Policy, 39(4), 581–601. Kumanyika, S. K. (2019). Unraveling common threads in obesity risk among racial/ethnic minority and migrant populations. Public Health, 172, 125–134. https://doi.org/10.1016/j.puhe.2019.04.010 Laidley, J., & Aldridge, H. (2020). Welfare in Canada, 2019. Caledon Institute of Social Policy. Lees, L. (2008). Gentrification and social mixing: Towards an inclusive urban renaissance? Urban Studies, 45(12), 2449–2470. Lewis, O. (1959). Five families: Mexican case studies in the culture of poverty. Basic Books. Loxley, J. (2007). Transforming or reforming capitalism: Towards a theory of community economic development. Fernwood Publishing.

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Maru, Y. T., Fletcher, C. S., & Chewings, V. H. (2012). A synthesis of current approaches to traps is useful but needs rethinking for Indigenous disadvantage and poverty research. Ecology and Society, 17 (2), 7. McGrancee, D., Berdahl, L., & Bell, S. (2017). Moving beyond the urban/rural cleavage: Measuring values and policy preferences across residential zones in Canada. Journal of Urban Affairs, 39(1), 17–39. Michie, J. (2017). The Oxford handbook of mutual, co-operative, and co-owned business. Oxford University Press. Oreopoulos, P. (2008). Neighbourhood effects in Canada: A critique. Canadian Public Policy, 34(2), 237–258. Pirrie, M., Harrison, L., Angeles, R., Marzanek, F., Ziesmann, A., & Agarwal, G. (2020). Poverty and food insecurity of older adults living in social housing in Ontario: A cross-sectional study. BMC Public Health, 20(1), 1320. https:// doi.org/10.1186/s12889-020-09437-3 Porter, M. E. (). The Competitive Advantage of the Inner City." Harvard Business Review 73, no. 3 (May–June 1995). Putnam, R. (1994). Making democracy work: Civic traditions in modern Italy. Princeton University Press. Randolph, B., & Tice, A. (2014). Suburbanizing disadvantage in Australian cities: Sociospatial change in an era of neoliberalism. Journal of Urban Affairs, 36, 384–399. Raphael, D., Bryant, T., & Mendly-Zambo, Z. (2019). Canada considers a basic income guarantee: Can it achieve health for all? Health Promotion International, 34(5), 1025–1031. https://doi.org/10.1093/heapro/day058 Ravensbergen, F., & VanderPlaat, M. (2010). Barriers to citizen participation: The missing voices of people living with low income. Community Development Journal, 45(4), 389–403. Reimer, B. (2006). The informal economy in non-metropolitan Canada. Canadian Review of Sociology and Anthropology, 43(1), 23–49. Revington, N., & Townsend, C. (2016). Market rental housing affordability and rapid transit catchments: Application of a new measure in Canada. Housing Policy Debate, 26(4–5), 864–886. Schill, K., Terbasket, E., Thurston, W. E., Kurtz, D., Page, S., McLean, F., Jim, R., & Oelke, N. (2019). Everything is related and it all leads up to my mental well-being: A qualitative study of the determinants of mental wellness amongst urban Indigenous elders. British Journal of Social Work, 49(4), 860– 879. https://doi.org/10.1093/bjsw/bcz046 Statistics Canada. Table 11-10-0135-01 Low income statistics by age, sex and economic family type. https://doi.org/10.25318/1110013501-eng Statistics Canada. Table 11-10-0026-01 Low income duration of tax filers in Canada. https://doi.org/10.25318/1110002601-eng

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Thukral, J. (2010). Race, gender, and immigration in the informal economy. Race/Ethnicity: Multidisciplinary Global Contexts, 4(1), 65–71. Walks, A. (2016). Homeownership, asset-based welfare and the neighbourhood segregation of wealth. Housing Studies, 31(7), 755–784. Walks, R., & Bourne, L. S. (2006). Ghettos in Canada’s cities? Racial segregation, ethnic enclaves and poverty concentration in Canadian urban areas. Canadian Geographer/le Géographe Canadien, 50(3), 273–297. Walks, R. A., & Maaranen, R. (2008). Gentrification, social mix, and social polarization: Testing the linkages in large Canadian cities. Urban Geography, 29(4), 293–326. Whysall, P. (1995). Regenerating inner city shopping centres: The British experience. Journal of Retailing and Consumer Services, 2(1), 3–13. Whysall, P. (2011). Managing decline in inner city retail centres: From case study to conceptualization. Local Economy, 26(1), 3–17. Wilson, W. J. (2010). Why both social structure and culture matter in a holistic analysis of inner-city poverty. Annals of the American Academy of Political and Social Science, 629, 200–219. https://doi.org/10.1177%2F0002716209 357403

CHAPTER 5

The Household as Financial Manager

Studies of financial vulnerability in Canadian households focus attention predominantly on household debt. Often that focus is on mortgage debt because of its macroeconomic importance as well as its considerable size in a household’s portfolio. The participants in the Canadian Financial Diaries project demonstrated a variety of circumstances, reactions, behaviors, and experiences with their financial situation only partly associated with debt and none with mortgage debt (though one had a line of credit secured by their house). These histories suggest one of our central hypotheses, namely, that rather than simply over-indebtedness, the concept of financial vulnerability for financial well-being is broader and requires a robust understanding of the phenomenon. Inclusive metrics will capture the multidimensional and contextdependent nature of financial vulnerability, allowing for more than simply debt-driven financial difficulties. Our principal interest is in exploring indicators that might adequately represent financial vulnerability as experienced by low- and modest-income Canadians and reflect the accounts of the Financial Diaries participants, as seen in Chapters 3 and 4. Our challenge is that beyond the commonly examined statistical ratios of indebtedness (debt to disposable income, debt to assets, and debt service ratios, primarily), indicators of any broader conception are varied, reflecting the difficulty of operationalizing the broader concept. As a recent study by the International Monetary Fund (Leika & Marchettini, © The Author(s), under exclusive license to Springer Nature Switzerland AG 2022 J. Buckland and B. Spotton Visano, Financial Vulnerability in Canada, https://doi.org/10.1007/978-3-030-92581-9_5

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2017) notes, financial vulnerability is a concept that “remains vague and there is a lack of consensus on operative definitions.” This chapter examines statistical representations of different conceptions of financial vulnerability and presents national quantitative data describing components of that financial vulnerability in greater detail. We first summarize the conventional indicators of household debt in Canada and then explore a broader conception of financial vulnerability inclusive of and especially relevant to our population of interest. To obtain a fuller picture of these especially vulnerable households as financial managers, we drill down below the national averages to examine some of the intersections between different measures of financial vulnerability and the various socioeconomic markers that add important texture to the national portrait.

Financial Vulnerability as Over-Indebtedness As explored in much of the existing literature, financial vulnerability focuses on the debt levels of households and individuals. In Canada, mortgage debt receives the greatest attention, followed by other forms of consumer debt to mainstream financial institutions (banks and credit unions, primarily) such as credit card debt and overdrafts. While highcost debt, such as debt to payday loan companies and other alternative financial service providers, may be important for some individuals and households, these forms of consumer debt receive relatively less attention, as we shall see. Financial Vulnerability from Mortgage Over-Indebtedness For many Canadian households, home ownership is their largest single investment. Mortgage debt backed by the value of real estate makes up more than 68% of total household debt. On a seasonally adjusted basis, Canadian total mortgage debt was $1,685.3 billion in the first quarter of 2021, and consumer debt and non-mortgage loans approximately $786.5 billion. As a proportion of disposable income, Canadian households owed

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$1.72 in total credit market debt for every dollar of disposable income, of which $1.17 was mortgage debt.1 When interest rates rise, households with higher debt relative to income are more vulnerable to interest rate increases. Interest rate increases require increased payments on new and renegotiated mortgages, thus driving up household monthly expenditures. From this perspective, Canadian households are almost twice as leveraged as they were 20 years ago and therefore are, on average, more financially vulnerable by this metric alone. And it is this debt-to-income metric more than any other indicator that receives media and political attention. A closer look at the highly mortgage-indebted households reveals a noticeable income differential. Examining new mortgages for purchase from federally regulated lenders,2 Bilyk et al. (2017) find that of the households in the lowest-income quintile, 44% had a share of low-ratio mortgages with a debt-to-income ratio of greater than 450%, or $4.50 of debt owed for every dollar of disposable income—much higher than the Canadian average of $1.17. Conversely, of those households in the highest income bracket, only 7% had such a high burden of debt to income. Further, those with higher debt-to-income ratios held a greater portion of the total mortgage debt. The mortgages of these more vulnerable households are larger than the average mortgage, making up 32 per cent of the value of all low-ratio mortgages in 2016, up 9 percentage points from 2014. The fact that the share of high-[loan to income] mortgages increased to almost one-third of the low-ratio mortgage originations suggests stronger household sector vulnerabilities. (Bilyk et al., 2017, p. 29)

Debt-to-income measures of financial vulnerability obscure the importance of the value of the assets underlying the portfolio of the household.

1 Data retrieved July 8, 2021, from Statistics Canada, Household sector credit market summary table, seasonally adjusted estimates, Table 38-10-0238-01 (https://doi.org/10. 25318/3810023801-eng) and author’s calculations. 2 The data “exclude credit unions and caisses populaires, which are provincially regu-

lated, as well as mortgage investment companies, mortgage finance companies and other private lenders. The largest portion of excluded mortgages are insured mortgages because many of the lenders that are not federally regulated focus on issuing this type of mortgage” (Bilyk et al., 2017, p. 22). Low-ratio mortgages are mortgages where the loan-to-[house] value ratio at signing is at or below 80%.

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Everything else being equal, a higher (lower) debt-to-asset ratio for a household will raise (lower) the financial vulnerability of a household. The ability of households to repay their debt when faced with negative shocks depends on both their levels of debt as well as their asset holdings (see MacDonald & Traclet, 2018). With mortgage debt, the underlying value of the real estate securing that mortgage is especially important for assessing vulnerability, since the institutional means for extracting the equity (i.e., the current value of the assets over the liabilities) in one’s home is well established. Mortgage debt secured by real estate will pose less of a risk to either the household or the financial system generally than any unsecured debt, since equity in the asset may be extracted through refinancing or accessing home equity lines of credit (HELOCs), or the real estate may be sold to pay off the debt.3 By a debt-to-asset measure of financial vulnerability, Canadian households are on average only marginally more vulnerable than they were 30 years ago, since the “increase in debt levels has been accompanied by similar increases in the value of assets, leaving the debt-to-asset ratio nearly unchanged since 1991, despite some fluctuations” (Marshall, 2019, p. 1). Assets include liquid assets that serve as a financial safety margin. Financial vulnerability is higher when households have no liquid assets—households with no savings are more financially vulnerable than households with savings to decreases in income or increases in payments, including unexpected increases in loan payment amounts because of higher interest rates at the time of resetting or renegotiating a mortgage. Marshall (2019, p. 4) suggests that “higher debt levels—for a given value of assets—expose families to greater risk of financial distress. However, the debt-to-income ratio does not tell a similar story.” Yet while an important complementary indicator to the debt-toincome ratio, the debt-to-asset ratio as an indicator of financial vulnerability masks a latent threat to vulnerability if the house prices are volatile or unsustainably high. By construction, price volatility in the value of the underlying asset can alone drive volatility in this measure of financial vulnerability. Of considerable concern to the Bank of Canada is the

3 Using proprietary data from Mortgage Professionals Canada, Ho et al. (2019) show that Canadians extracted an average per-event amount of $54 thousand through mortgage refinancing and $12 thousand through HELOCs in 2017. Of the equity extracted, 28% went to consolidate other debt and 25% went to consumption spending (the remainder was split between home renovations and investments).

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possibility that an inflated real estate market may see a price correction and a significant drop in the value of the real estate securing the mortgage debt. By convention in Canada, as elsewhere, while housing prices fluctuate with changes in market conditions, mortgage debt is fixed in nominal terms. Any sharp drop in the price of the underlying asset will drive debt-to-asset ratios higher, reflecting an increased vulnerability to both the household and the lender. Financial vulnerability as measured by debt-to-income and debt-toasset ratios is, however, only a set of abstract numbers on balance sheets unless and until a household is forced to sell their home at a price below the outstanding balance on their mortgage.4 A more immediate set of indicators of financial vulnerability are the liquidity indicators, which better reflect whether the household can, in fact, afford to meet their mortgage payments. Conventional Liquidity Indicators of Mortgage Indebtedness Liquidity concepts focus on a household’s or individual’s ability to meet current consumption expenditures out of available income flows. For the mortgage holder, the immediate concern is the affordability of the principal and interest payments required to service their mortgage debt. Since households are not required to pay off all their debt in a given year, what matters more for financial vulnerability is not so much the level of their debt relative to disposable income, but rather the capacity of households to meet their debt service obligations. This capacity is measured by comparing total obligated debt service payments to household disposable income—the debt service ratio (DSR). (Parliamentary Budget Office, 2017, p. 3)

Canadian household debt service ratios have been fluctuating between a low of 10.6% and a high of just over 15% of disposable income since 1991, and in mid-2021 hovered around 13%.5

4 A more immediate pressure may be introduced if, at the time of renegotiating a mortgage contract, the lender reassesses the property and adjusts downward the value of the real estate. 5 Data retrieved July 8, 2021, from Statistics Canada, Debt service indicators of households, national balance sheet accounts, Table 11-10-0065-01 (https://doi.org/10.25318/ 1110006501-eng).

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Illiquidity is a cash-flow problem appearing when current income is inadequate to cover current expenditures. When a mortgage holder faces financial difficulties, renegotiating the payments to cover the direct costs of the mortgage only, postponing the payments on the principal of the debt, may be an option. The risk of illiquidity forcing a distress sale of assets and consumer bankruptcy arises when households cannot meet their interest-only debt payments. A more nuanced liquidity measure of financial vulnerability looks at the interest-only portion of debt service, and from this perspective on financial vulnerability, the situation has been quite stable. Mortgage interest–only debt service payments as a percentage of disposable income have remained under 4% of total household disposable income for more than 10 years.6 While house price increases have driven up the overall mortgage debt as percentage of income, the decline in interest rates has kept the debt service costs low. Dey et al. (2008) at the Bank of Canada identify a debt service ratio of 35% as a critical threshold, “above which there is a significant increase in households’ propensity to be delinquent on their mortgages. In addition, the 40% threshold is a common industry standard for loan eligibility, above which a household is expected to have more difficulty making loan payments” (Peterson & Roberts, 2016). Except for the highly indebted households, then, Canadians’ total debt service ratio appears to remain safely under this critical threshold. Interest rates are, however, at historical lows, and so the possibility of future increases threatening the ability of homeowners to continue servicing their mortgage debt is a question about future financial vulnerability.7 Mortgage-Indebted Homeowners in Canada The homeownership rate (with and without a mortgage) in Canada was 62.8% in 2016 and was heavily weighted to those with higher incomes. According to Uppal (2019), homeownership was most prevalent among those in the highest income quintile (88.2%) and least prevalent among

6 Retrieved on July 8, 2021, from Statistics Canada Debt service indicators of households, national balance sheet accounts, Table 11-10-0065-01 (https://doi.org/10.25318/111 0006501-eng). 7 Examining the effect of a change in interest payments on disposable incomes and other forms of spending and saving, Kartashova and Zhou (2019, p. 31) find that “when rates go up at reset … mortgage rate resets do not appear to discourage durable spending, render consumers more leveraged or increase the chance of defaults.”

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those whose income was in the lowest fifth of income earners (24.5%). Unattached individuals and lone parent families had the lowest rates of homeownership (38.6 and 44.8%, respectively), whereas the rate was much higher (78%) among couples with or without children. About twothirds of homeowners—or less than half of all Canadians—had a debt against that property as either a mortgage or a HELOC. Overall, the conventional mortgage indicators of financial vulnerability suggest that for the past several years, mortgage-indebted Canadians have experienced a rather stable financial situation. Significant increases in the debt-to-income ratio have been offset by low and falling interest rates such that mortgage debt-service ratios have remained well below the safety threshold. Emerging threats to this stability lie in the anticipated future increase of interest rates, especially so given the recent rise in mortgage debt relative to income. These threats to financial vulnerability from mortgage debt are likely greater for lower-income households, unattached individuals, and lone parent families in Canada, for whom the debt-to-income ratios tend to be higher. These mortgage debt indicators of financial vulnerability ignore the financial strains of the more than half of Canadian households who either do not own their principal residence and so do not have a mortgage or own their home but do not carry debt against it. Given that many renter households are in the lower-income brackets, mortgage debt indicators of financial vulnerability offer only a partial picture of the financial vulnerability of all Canadians. It remains doubtful whether financial vulnerability experienced by higher-income, mortgage-indebted Canadians informs us of the experience of lower-income renters when designing policies to support the overall financial well-being of all Canadians. Financial Vulnerability from Conventional Non-Mortgage Debt Continuing with the notion of financial vulnerability as overindebtedness, in this section we consider these same indicators for conventional credit market debt other than mortgages. Such conventional debt is primarily credit card debt and non-mortgage bank loans, about which we will say more in Chapter 6. Again, debt-to-income and debt service ratios for non-mortgage, conventional debt has been relatively steady. Noticeably, while consumer non-mortgage debt is a much smaller fraction of the total conventional household debt (nearly 32% in 2021) than mortgage debt, the interest

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on non-mortgage consumer debt has been approximately the same as the interest on mortgage debt since the early 2000s, owing to the significantly higher interest rates on credit card debt especially. Financial vulnerability as over-indebtedness is the risk of consumer insolvency. The profile of Canadian consumers filing for bankruptcy and consumer protection sheds light on those Canadians unfortunate enough to succumb to these risks. In 2019, the number of consumers with credit card debt (88%), bank loans (56%), and finance company loans (37%) outstripped the number of consumers with mortgage debt at the time of filing.8 Of the more than 137 thousand Canadians filing for either bankruptcy (40%) or proposals (60%), only 21% owned a home, and then the median value was only $210,000.9 Given that the national average house price in Canada, excluding the Greater Vancouver and Toronto Areas, was just under $400,000 in December 2019, mortgage debt is clearly neither a unique nor a primary cause of indebted Canadian consumer insolvency (see Canadian Real Estate Association, 2019). Noting a breakdown by income of filer, the Office of the Superintendent of Bankruptcy (OSB, 2020) reports that the median household income of insolvent debtors in 2019 was approximately $32.6 thousand. The median household size was 2.1 people. Clearly, the realized risks of over-indebtedness as consumer insolvency are heavily skewed toward the lowest-income Canadians. And since $32.6 thousand is near the poverty line, these data suggest that at least half of the insolvent households have tried using debt to bridge the gap between their near- or below-poverty-line income and their higher basic living costs. In view of this detail, the coding of causal factors of financial difficulty by the OSB is disturbing. While loss of income (37%) and medical reasons (23%) are the top two debtor-identified reasons cited for financial difficulty, the report includes the statement that “69% of debtors provided reasons for financial difficulty that can be categorized under the heading ‘Financial Mismanagement,’” where the explanatory notes indicate that 8 Data retrieved on February 19, 2021, from the Office of the Superintendent of Bankruptcy (2020), Canadian Consumer Debtor Profile—2019 (https://www.ic.gc.ca/ eic/site/bsf-osb.nsf/eng/br04358.html). 9 Office of the Superintendent of Bankruptcy (2020). Bankruptcy is a formal process whereby debtors who cannot meet their obligations sign over all their assets to a Licensed Insolvency Trustee. A consumer proposal is a formal offer by a debtor to creditors to settle debts. See “Insolvency Definitions” (Office of the Superintendent of Bankruptcy, 2020).

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this analysis “uses a combination of business rules and business intelligence tools to separate the information into 13 categories selected by the OSB.” When this categorization was explored further with a representative of the OSB, the OSB reported using “Financial Mismanagement” as a “catch-all” category for a host of “non-specific financial matters responses such as ‘too much debt,’ ‘insufficient income’ or ‘overextension of credit.’”10 That a catch-all category is needed seems reasonable. That the label of the catch-all category suggests negligence or worse on the part of a consumer eking out a living on an “insufficient income” that was, for at least half of the filers, near or below the official poverty line, is troubling and highly suggestive of the ideational influence referred to above in Chapter 1. Conventional household debt that is tracked includes “outstanding balances on credit cards (held by 29% of Canadians), vehicle loans or leases (28%), personal lines of credit (20%), and student loans (11%). Other less common types of debt include a mortgage for a secondary residence, rental property, business or vacation home (5%) or personal loan (3%)” (Financial Consumer Agency of Canada [FCAC], 2020, p. 3; see Henry et al., 2018, as well).11 What these data omit altogether is the unconventional high-cost debt owed to non-financial firms such as payday lenders. Financial Vulnerability from High-Cost Debt High-cost debt exists in the form of payday loans,12 installment loans, and rebate advances, for example. Producer-supplied data on high-cost debt are not collected, thus the fuller picture of the role high-cost debt plays in creating, exacerbating, or possibly defining financial vulnerability

10 Email received March 18, 2021, from the Business and Data Analytics Team of the Office of the Superintendent of Bankruptcy. 11 Less than 1 in 3 Canadians paid their full balance on their credit card statement (32% for low-income users and 28% for higher-income users), according to Henry et al., (2018, p. 39). 12 Contrary to the “payday” label, Simpson and Islam (2018, p. 62) observe “an increasing reliance of clients on sources of income other than wages and salaries, particularly social assistance, public retirement income and other transfer income.” And that this is particularly noticeable for repeat borrowers.

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escapes careful analysis. These credit products are offered by commercial firms outside of the traditional financial system. While some of the lending in this sector is governed by provincial and territorial consumer protection legislation, there remain no reporting requirements and consequently no supplier-provided data for the industry. Instead, we must rely on self-reported usage by respondents to the consumer surveys, to the extent such information is asked. Self-reported usage is, however, asked after only insofar as national surveys explore incidence as an indicator of financial vulnerability. In none of the surveys are we able to derive highcost debt-to-income, high-cost debt service, or high-cost debt-to-asset ratios for households using high-cost debt. We have no knowledge whatsoever of how the costs of this debt are driving a further deterioration of a household’s financial situation as measured by conventional household financial vulnerability indicators. We only know that income-poor and asset-poor households may be more likely to use it. In their analysis of payday loan use from the Canadian Financial Capability Survey (2009 and 2014) and the Survey of Financial Security (2005 and 2012), Simpson and Islam (2018) report a relatively low incidence of payday loan use, ranging from 1.8 to 4.2% of the respective survey respondents (p. 43). They note, though, the under-representation of lowincome households without a telephone in both waves of both surveys, a demographic which may be more likely to use high-cost credit (see Marshall, 2019, as well). From the analysis of the available data in a comparison of borrowers and non-borrowers, Simpson and Islam (2018, p. 61) conclude that “payday loan clients are likely to come from households in the lower, although not lowest, income categories” but suggest “caution in emphasizing income as a dominant factor in determining payday loan behaviour.” They conclude that what “endures is the role of net worth, since clients remain less wealthy with smaller levels of assets and debt and lower rates of home ownership” (p. 61). There is a “strong association between household asset levels or net worth and the incidence and frequency of borrowing.” Marshall (2019, p. 4), examining the 2016 Survey of Financial Security data, finds a similar result: where debt to income is not significantly associated with his distress indicators (skipping or postponing bill payments and using payday loans), families with debt-to-asset ratios above 0.5 (the value of debt 50% or more of the value of their assets) were more than twice as likely (16% versus 7%) to miss or delay payments or use a payday loan than those families with a debt-to-asset ratio at or less than 0.25.

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Financial Vulnerability as More Than Over-Indebtedness Various mortgage and conventional non-mortgage debt-related metrics are critical indicators of the financial vulnerability of the household. Since mainstream banking is the principal supplier of this credit, these metrics are critical indicators of the vulnerabilities of the wider banking system as well. Whether households can manage their debt day-to-day depends largely on debt service relative to income, but as we have seen, it is the debt-to-asset ratio that may provide critical information about the default risks to solvency. From the Canadian Financial Diaries evidence, however, we have an idea that financial vulnerability is more than over-indebtedness. Where over-indebtedness may cause financial insecurity as household insolvency if house prices fall below the value of the outstanding mortgage, for example, the balance-sheet problems can drive cash flow or liquidity problems if payments increase, from, say, an increase in interest rates, above what the household can afford out of its monthly income. Debt is not the only possible driver of such problems. Robust indicators of financial vulnerability will track these liquidity and solvency effects directly, accounting for such debt-driven situations but not uniquely or exclusively tied to them. From the Financial Diaries, we see evidence of financial stress, only some aspects of which relate to unsustainable debt. Broader indicators include difficulty keeping spending within income limits and an inability to pay for basic needs. This suggests that some of the experience of financial vulnerability can exist independently of any household debt. More than simple debt totals or debt service ratios can reveal, the portrait of a financially vulnerable household is one in which its members experience immediate and near-term liquidity problems appearing as struggling to pay for basic needs and skipping utility, rent, debt, and other bill payments (see Finney, 2015, p. 15). When faced with a shortfall of income to cover immediate expenses, the financial vulnerability of Canadian households finds expression as well in low financial margins of security or safety (the narrow pathways described in Chapter 3) related to little or no savings, carrying credit card balances, having limited borrowing options when faced with an unexpected expenditure or a sudden loss of income, inability to rely on social networks and having to rely on high-cost credit options

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instead. Subjectively, financial vulnerability appears as self-reported feelings of financial anxiety and financial stress, which have a critical impact on one’s overall sense of life satisfaction and well-being. Broader Material Indicators of Financial Vulnerability In this section, we explore liquidity stress, financial security, and subjective feelings of financial confidence and stress as broader indicators of financial vulnerability to the extent possible from the data available. Data informing broader national indicators of financial vulnerability are scattered across results from Statistics Canada’s Survey of Financial Security and General Social Survey (for subjective experiences) and the Financial Consumer Agency of Canada’s Canadian Financial Capability Survey, as well as a host of smaller studies in the psychology of financial distress and elsewhere. In the national studies, differently worded questions for surveying essentially the same concept and varying categories of answers make it difficult to compare across statistical portraits. For example, we know the use of high-cost credit to cover expenditures may be an important component of the experience of financial vulnerability, yet extracting consistent profiles across key source surveys is problematic and severely constrained. Although high-cost credit exists in several forms such as payday loans, installment credit, rent-to-own, and other forms of cash advance, the national consumer surveys ask after only the use of payday loans. The Survey of Financial Security has asked, “In the past 3 years, have you [or anyone in your family] borrowed money through a pay day loan?,”13 whereas earlier versions of the Canadian Financial Capability Survey asked, “If you had to make an unexpected expenditure today of $500, how would you pay for this expense?,” with one answer option being “Go to a pawnbroker or payday loan service.” The recent 2019 Financial Well-being and Capability Survey lumps conventional and highcost credit together in one answer option (“Other credit [credit card, loan

13 After asking respondents to identify mortgages, HELOCs, and conventional loans and lines of credit, deferred payment plans, from financial institutions, the 2019 Survey of Financial Security now asks only “Do you have any other money owed and not already reported? Include: taxes owing, past due bills.”

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from bank or credit union, loan from a payday lender, overdraft protection]”) to a question about credit products: “Do you have any of the following products in your own name (or jointly with someone else)? Messacar and Morissette (2020, p. 3) state that the Survey of Financial Security of 2016 “provides the most up to date snapshot and is likely a reasonable approximation of the potential financial vulnerability of Canadian families going into the COVID-19 pandemic.” As we shall see, however, there are important dimensions of financial vulnerability that even the Survey of Financial Security does not cover. Today’s Liquidity Problem Liquidity stress is the struggle to manage to cover living expenses and occurs when expenditures are greater than income in a week or a month. This imbalance between spending and income flows manifests in having problems paying bills, falling behind on bill payments, and worrying about money. From the survey data we have, the incidence of this struggle has been significant over recent years. According to the most recent Canadian Financial Capability Survey, in 2019, almost 1 in 3 Canadians indicated that they were “keeping up, but it is sometimes a struggle” (EKOS Research Associates, 2019). One in 6 (17%) Canadians have monthly spending that exceeds their income, and 1 in 12 (8%) have fallen behind in the preceding 12 months (FCAC, 2020, p. 7). As compared with the results from the earlier 2014 survey (FCAC, n.d., p. 3), fewer Canadians are struggling (17% versus 29%), but more are unable to keep up with bill payments (8% versus the earlier 2%). From the Survey of Financial Security (Marshall, 2019, p. 3), among only the indebted households in Canada, 11% skipped or delayed a non-mortgage payment and 4% skipped or delayed a mortgage payment in the year prior to the 2016 survey. These results suggest that financial vulnerability as skipping or delaying bill payments is more common than simply skipping or delaying debt payments. Financial Insecurity and a Threat to tomorrow’s Liquidity When Canadians struggle to cover daily expenses out of income, vulnerability will be influenced by the financial options available to help them cope. In addition to the borrowing options discussed above, the first line of defense is to rely on emergency savings. For a given cash-flow struggle, a household will be more financially vulnerable the lower their emergency

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savings. Questions that attempt to probe household financial resilience in this dimension include questions about the ability to cover small emergency expenses (Canadian Financial Capability Survey) and the ability to cover one month of income and a one-third drop in income (Financial Well-being and Capability Survey). Whereas the Canadian Financial Capability Survey previously asked after the ability to cover a small-value ($500) expense in earlier versions of the questionnaire, it no longer does so. Yet as we shall see in the next chapter, where the threat to a low-income household’s financial stability may arise from an emergency expense to cover dental, vision, appliance, or automobile repairs, the small-value question is potentially informative. And in 2015, 43% of Canadians reported that they would not draw on savings or emergency funds to cover an unexpected expense as low as $500 (FCAC, n.d.). The 2019 value of $2,000—as the survey benchmark of an emergency savings amount—is approximately equal to the monthly income needed to cover basic expenses as estimated by the Low Income Cut Off poverty measure.14 In this way, there is loose comparability between the Survey of Financial Security, Canadian Financial Capability Survey, and Financial Well-being and Capability Survey questions on this poverty-line dimension of financial vulnerability. Of the recent information available, more than 1 in 6 Canadians “probably could not” (8%) or “certainly could not” (8%) come up with the $2,000 to cover an unexpected expense. From the Survey of Financial Security, for a related measure of financial vulnerability, Messacar and Morissette (2020) examine emergency savings as two months of liquid assets.15 By this measure, approximately 1 in 4 Canadian families “would not have enough liquid assets and other private sources of income to make ends meet, i.e. to keep them out of low

14 “In absolute terms, financially vulnerable families would, in the absence of government transfers, lack $3,489 (in 2016 dollars), on average, to keep them out of low income during a two-month work interruption … In other words, these families would lack about $1,745 per month, on average, to make ends meet, if they did not receive any government transfers” (Messacar & Morissette, 2020 p. 5). 15 “Families who rely primarily on earnings—wages and salaries and self-employment

income—to maintain their living standards. Among this group, the study identifies families who would not have enough liquid assets and other private sources of income to make ends meet, i.e. to keep them out of low income during a two-month work stoppage in the absence of government transfers or borrowing. This includes working Canadians and their dependents, such as children and spouses” (Messacar & Morissette, 2020, p. 3).

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income during a two-month work stoppage in the absence of government transfers or borrowing” (Messacar & Morissette, 2020, p. 3).16 Savings and Household Solvency Emergency savings are the most liquid form of a household’s financial assets and the most likely form of financial security. Asset poverty as financial vulnerability exists more broadly if a household’s “assets (financial assets or net worth, taken separately) are insufficient to maintain wellbeing at a low-income threshold for 3 months” (Rothwell & Robson, 2018, p. 17). A household with a positive net worth (the value of assets greater than the value of its liabilities) is said to be solvent. Asset values are conceptually thought to be equal to the discounted stream of income to the asset. This conceptual understanding of assets as a stream of future income is helpful for understanding the financial situation of the household beyond simply the solvency of a household’s financial portfolio. Possessing the skills for paid employment provides the employee with a regular stream of income, and so in this sense a job is an asset, as discussed above in Chapter 3. The job as an asset may be compared to a household’s lifetime expected expenses to obtain a conceptual benchmark for threshold household solvency. If the idea of a poverty line renders tangible a minimum level of income needed to cover basic expenses for subsistence, the discounted value of a stream of expected poverty-level income gives us a conceptual benchmark for assessing the long-term financial solvency of the household. If, for example, paying a minimum-wage rate to a person employed full time does not generate enough income to cover basic expenses as defined by the official poverty line, the person is conceptually insolvent. In this example, when borrowing to cover daily expenses cannot improve income earning potential in the future, that debt is unsustainable. Education is an investment from the perspective of building human capital for generating more future income from a higher paying job.

16 “If the combined sum of the total value of these liquid financial assets and other

(non-employment) private sources of family income expressed on a two-month basis falls below the low income cut-off (LICO) before tax for 2016 expressed on a two-month basis, then individuals in this family are identified as financially vulnerable. For these individuals, asset liquidation cannot keep them out of low income for the duration of a two-month work stoppage” (Messacar & Morissette, 2020, p. 6).

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Those who might benefit most from some incentives policies intended to promote education are, however, least likely to access these supports because of financial constraints. In this paradoxical way, a state of higher financial vulnerability becomes entrenched. Bonikowska and Frenette (2020) find that for parents eligible to participate in registered education savings plans (RESP) savings, differences in wealth remain the single most important factor behind the gap in RESP participation by family income, even after accounting for differences in parental education and literacy, numeracy and financial literacy. In fact, differences in wealth accounted for 50% to 79% of the total gap in RESP participation between families in the top and bottom income quartiles, depending on the method and dataset used. (p. 33)

Socioeconomic Characteristics of Vulnerable Canadians In this next section, we explore some descriptive evidence as bivariate correlations between a sample of these broader indicators and some underlying socioeconomic characteristics. Significant variation across income levels, age, and family status, for example, suggests that structural factors are important. Were individual characteristics (psychological predispositions, for example) or agent-controlled characteristics (such as behaviors) all that mattered for determining financial vulnerability, we would expect to see no differences in indicators across structural characteristics. Instead, the data suggest there are contributors to financial vulnerability that lie outside of the control of any one individual. Financial Vulnerability and Income In addition to jobs having asset-like qualities, they also provide income. And the size of a person’s income has a strong bearing on their financial well-being. But it is certainly not a one-to-one relationship. Research has found that the relationship of income to well-being (or happiness or life satisfaction) is complex (see Easterlin, 2006, for example). It depends on whether a person’s basic needs are met or not, on their relative position with respect to a reference group, and what brings meaning to their life. If someone has inadequate food, shelter, or medicine, they will feel less

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happy than if they have adequate amounts of these things. If a person’s basic needs are met and their income rises in tandem with their reference group, then there is evidence that this will not lead to greater happiness. Finally, as seen with several Financial Diaries participants, some people are not looking for an ever-increasing amount of income but enough to pay the bills plus a little more. Data from the Canadian Financial Capability Survey show that income level affects a variety of financial capabilities or habits as indicators of financial vulnerability. What is noticeable is a marked difference between the financial experience reported by those with incomes below $40,000 and those above $40,000. As Table 5.1 summarizes, evidence from the 2019 Canadian Financial Capability Survey suggests that having a low income considerably and adversely affects the ability of Canadians to meet their current and near-term financial commitments. Examining data from the Survey of Financial Security, we see that individual groups at high risk of being unable to make ends meet for even one complete month of joblessness include single mothers and their children, and individuals living in families in which the main income earner is under 35 years of age and does not have a high school diploma (Messacar & Morissette, 2020, p. 5). Table 5.1 Indicators of financial vulnerability Financial vulnerability related to … Monthly spending exceeding income Borrowing to pay for food and other necessities Inability to make ends meet even after selling liquid assets and using other private sources of income Falling behind Inability to cover 3 months’ expenses with certainty

Canadian average (%)

Lowest income $40K (%)

17

27

14

27

39

25

35

60

26

8 36

15 52

5 33

Source Canadian Financial Capability Survey (2019) and FCAC (2020)

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Financial Vulnerability and Family Status Results from the 2019 Canadian Financial Capability Survey are consistent with results from the Canadian Financial Diaries. For instance, in terms of ability to meet one’s daily financial obligations, the survey found that lone parents and people who are separated or divorced have more challenges (FCAC, 2020, p. ii). Similar results relate to the question of managing one’s monthly cash flow. The survey found that 1 of 6 (17%) Canadians struggle with this. This is an issue when a person’s income runs out before the expenses do. The rate of this challenge was double (34%) for lone parents and higher for people who are separated or divorced (24%) (FCAC, 2020, p. 7). Conversely, married and common-law partners are less likely (15%) to face the monthly income-spending gap (p. 7). One-quarter of Canadians (27%) borrow to buy food or other daily expenses, but this rate jumps to 37% for those who are separated or divorced and even higher for lone parents (54%) (FCAC, 2020, pp. 7–8). The rate of this type of borrowing drops to 25% for those who are married or living common-law. Keeping up with bill payments is another area in which family structure changes affect financial vulnerability. Eight percent of Canadians say that they are falling behind in bill payments, but 17% of lone parents and 11% of separated and divorced people have this experience (FCAC, 2020, p. 7). Conversely, 6% of married or common-law respondents find bill payments a challenge. Finally, 64% of Canadians have an emergency fund to cover three months’ expenses (FCAC, 2020, p. 23). Lone parents are the least likely to have these funds, at 36%. Divorced and separated people also have a lower likelihood of having an emergency fund, at 55%. Those who are married or widowed are more likely to have these funds, at 70% and 78%, respectively. As the Financial Consumer Agency of Canada summarizes (2020), individuals. who are married or widowed are also more likely to have an emergency fund and be able to cover an unexpected expense. In contrast, individuals who are living with a common-law partner, separated or divorced, or single and never married, especially lone parents, are less likely to have emergency funds or say they could cover this unexpected cost. Finally, even though women and men are equally likely to have money set aside in an emergency fund, women are less confident that they would be able to cover an unexpected cost of $2,000. (p. 16)

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Financial Vulnerability and Age The 2019 Canadian Financial Capability Survey casts more light on the relationship between age and finances. The report notes that “persons under age 65 are much more likely to be struggling to meet their financial commitments (39% vs. 22% for those aged 65 and older)” (FCAC, 2020, p. i). Seventeen percent of Canadians run out of income during the month. This jumps to 21% for people aged 35 to 54 years old, whereas only 14% of older Canadians aged 65 and up experience this monthly income gap (FCAC, 2020, p. 7). Twenty-seven percent of Canadians borrow to buy food or other daily necessities, but 34% of people under 55 years old have to borrow. Only 13% of people 65 years old and up need to borrow for this purpose. While 8% of Canadians claim to be falling behind in bill payments, the share rises to 10% for people under 55 years old and falls to 6% for those aged 65 and older (FCAC, 2020, p. 7). Having a three-month emergency fund was common for 64% of Canadians. But it was less common for younger people: 54% for those 55 years old or younger. And it was more common for older people: 80% for those aged 65 and older. Financial Vulnerability and Gender Insights from the 2109 Canadian Financial Capability Survey find that there may be only slightly different experiences between women and men in the realm of personal finances. For instance, the probability that women have a monthly income gap is only somewhat higher, at 19%, than that for men, at 16% (FCAC, 2020, p. 7). A similar gap exists with the need to borrow money to buy food or other daily necessities, at 29% for women and 26% for men. However, with respect to “meeting financial commitments” and “falling behind in bill payments,” the survey found no substantial differences.

Financial Vulnerability as Subjective Stress We know that people’s felt experience of financial vulnerability and stress is significant and potentially widespread, but we know very little about what contributes to their subjective stress. A recent study by the Canadian Payroll Association suggests that nearly 43% of workers are so financially stressed that it negatively affects their performance at work (FCAC, 2020,

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p. 3). In a study of the 2005 and 2010 General Social Survey results, Brzozowski and Spotton Visano (2020, pp. 578–579) find that almost 60% (59.2%) of the combined respondents in 2005 and 2010 identified a financial stress level of 3 (out of 5) or higher. Of those, 13% identified financial stress as their primary source of stress. In the Financial Wellbeing and Capability Survey, respondents are asked to provide descriptors, such as characterizing a household’s financial situation with bad/good adjectives. Until there is a carefully designed examination of how respondents interpret these different questions, we remain uncertain to what extent we have construct validity and compatibility. Subjective indicators of financial vulnerability appear to vary by age, but the precise shape of that relationship is unclear. With gains made in state support for older and retired Canadians, baby boomers, and the silent generation, there is evidence that this older group is doing better than in the past. They are also much more likely than younger people to have had a more stable employment history, for example with defined benefits, pension, and longer-term employment. Concern in the media often points to young people—millennials—who are more likely to rely on a contract-to-contract style “gig” employment, with few benefits or pensions (e.g., see Beach, 2016). This group is also said to be more likely to accumulate debt. Results from the Canadian Financial Wellbeing Survey (2019) suggest the mean age of respondents claiming to have very bad to very good household finances do not vary much, with Canadians who are younger tending to struggle slightly more. A similar small variation appears in the financial wellness scores. The top age group (73.4 through 91) had the highest level of perceived financial wellness, at 3.87 out of 5, followed by the second-highest group (55.7 through 73.3), at 3.66. The lowest age group (18 through 38) had a slightly higher financial wellness score, at 3.41, as compared with the second-lowest group (38 through 55.5), at 3.34. The immediate cause of the subjective feelings of financial stress is unknown. It may be the pressure of debt. Nearly one-third (31%) of Canadians responding to the 2019 survey believed they had too much debt (FCAC, 2020, p. 4). It may be the pressure of not being able to make ends meet on account of unexpected changes in income, where approximately the same percentage (28.9%) of Canadians subjectively report that the COVID-19 situation is having a moderate or major impact

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on their ability to meet financial obligations or essential needs (Statistics Canada 2020, as quoted in Messacar & Morissette, 2020, p. 3). And as we shall see in the next section, the apparent contributors to subjective financial distress do not perfectly correspond with the contributors to material indicators of financial vulnerability. While we do not know how financially vulnerable Canadians, as measured by our more immediate indicators, would self-assess their feeling of financial stress, we know that for Canadians who do feel financially stressed, “their stressaffected sense of financial well-being overwhelmingly conditions their overall sense of life satisfaction” (Brzozowski & Spotton Visano, 2020, p. 573).

Contributors to Financial Vulnerability The descriptive statistics for our indicators suggest that socioeconomic factors—especially low income, mismatching income and expenditures, and family status—may be contributing to financial vulnerability. In addition, as we saw in Chapter 2, the literature variously suggests other influences related to psychology, behavior, and education may also be important. In a closer examination of the results from the recent Financial Well-being and Capability Survey (2019), Brzozowski and Spotton Visano (2022) find that income levels, shocks to income or expenditure, and active savings behavior affect financial vulnerability in its three core dimensions of liquidity stress, financial security, and self-assessed feelings of stress and confidence. Moreover, being in the lowest-income quintile has nearly three times the impact on liquidity stress and confidence as being in the next highest income level. Psychological predisposition (self-control) and education factors (financial knowledge, experience with money management, and general education attainment) drive an index of liquidity stress but not financial security and not confidence. Contrariwise, accommodation (renting or owning), age, and psychological attitudes toward spending are important for both financial security and confidence but not liquidity stress. And finally, what matters for financial confidence is working in paid employment: those who are retired or not working for reasons other than being retired report lower levels of confidence. Notably, and consistent with Messacar and Morissette’s (2020) results from the Survey of Financial Security, what does not matter for any of these indicators of financial vulnerability is debt as a proportion of income. This result in particular

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casts some doubt on the importance to consumer well-being of the debtto-income ratios discussed above. Unfortunately, the Financial Well-being and Capability Survey does not ask about asset holdings, so the potential for an alternative debt-to-asset effect is untestable. From the General Social Survey (2005, 2010), the probability of an individual’s self-assessing financial stress as the primary source of stress is affected by age, employment status, family status, general education level, age, and gender. Notably, while having a high income (>$100K) reduces self-reported financial stress, “having a low income [