2017 CRDCN Conference, November The Many Faces of Inequality: From Measurement to Policy

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1 2017 CRDCN Conference, November The Many Faces of Inequality: From Measurement to Policy Understanding the Disparity in Financial Knowledge across Income Groups in Canada Mohammad N. Khan & David W. Rothwell 1

2 Background Researchers and policymakers have focused on financial capability to help individuals and families experiencing increasing disparities of wealth and income. Financial capability is people s ability and opportunity (Sherraden, 2013) to obtain, understand, and evaluate financial information (Lusardi, 2011) to make informed financial decisions. 2

3 Disparity in Financial Knowledge People with low-income appear to demonstrate low level of financial knowledge compared to their upper-income counterparts (Robb & Woodyard, 2011; Xiao et al., 2014). It is not yet evident whether financial knowledge influences people s income-ability or the levels of income and wealth influence people s level of financial knowledge (Hamilton & Darity, 2017) or there is a simultaneous effect. There is also a general agreement in literature that women have lower levels of financial knowledge than men (Fonseca, Mullen, Zamarro, & Zissimopoulos, 2012; Lusardi & Mitchell, 2014; Lusardi & Tufano, 2009). 3

4 Research questions I. To what extent does financial knowledge vary across income groups? II. What is the nature of the gender gap in financial knowledge both within and across income groups? 4

5 Data We use the restricted data from Statistics Canada s 2009 and 2014 Canadian Financial Capability Survey (CFCS) (Statistics Canada, 2009 & 2014). CFCS sampled 15,519 and 6,685 adult Canadians in 2009 and 2014 respectively through a two-phase stratified random sample administered with computer-assisted telephone interviewing. The survey provided weights for adjustment of non-response, and bias for selecting one individual in the household, and inconsistency in province-age-sex ratio with population estimates projected in the Census. We pooled data for analysis. Therefore, combined, these two crosssectional surveys sampled 22,204 respondents. 5

6 Measures: Dependent Variable Financial knowledge A Financial Knowledge Scale (FKS) was created from the 14-item financial literacy quiz using Item Response Theory. The FKS included 6 items. We used the standardized FKS in all analyses. The financial literacy quiz covered a wide range of concepts on financial knowledge that included interest rate calculation, understanding of inflation, stock market, credit, insurance, and other financial products and services. 6

7 Measures: Independent Variables Household income Household income was measured by the Low Income Measure (LIM) used by Statistics Canada. According to Statistics Canada, the LIM is 50% of median adjusted household income. The household income was coded with two categories (0=Nonlow-income household; 1=Low-income household). Gender We used gender as a dichotomous variable (1 = Female; 2 = Male). 7

8 Measures: Covariates Demographic variables: Age, family structure, children, immigration status, and First Nations status Socioeconomic variables: Education level, employment status, and home ownership Account ownership: We used a variable of account ownership to measure financial inclusion with two categories of those who do not have any personal or joint saving or checking account and those who have any. (0 = unbanked; 1 = banked). We also controlled for survey year 8

9 Analysis plan We ran t-tests to examine the mean difference of FKS between low-income and non-low-income groups, and between female and male. We ran both bivariate and multivariate regression on full sample (N=22,204) to see how household income and gender explain the variation of FKS. We simulated FKS scores to examine the gender gap in financial knowledge both within and across income groups. 9

10 Results: Description of the sample Variables/Category Proportion (N = 22,204) Low-income 19 Female 51 Living Single 38 Have children 32 Immigrant 22 First Nations 3 University degree 26 Employed 52 Own home 74 Unbanked <1 10

11 Results: Univariate The summary mean score of FKS was 3.72 with standard deviation of The standardized score of FKS ranged between and 1.21 with mean score of 0 and standard deviation of 1. 11

12 Results: t-tests 0,1 0,05 0-0,05-0,1-0,15-0,2 Household Income and FKS 0,025 0,02 0,015 0,01 0, ,005-0,01 Gender and FKS -0,25 Non-low-income Low-income -0,015 Female Male 12

13 Results: Regression Results Predicting the FKS Model- 1 Model- 2 Model- 3 Model- 4 Variables β(se) β(se) β(se) β(se) Household income Low-income -.25(.02)*** -.19(.02)*** -.10(.03)*** Gender Female -.04(.02)* -.01(.01) -.02(.02) Model R * p<.05, ** p<.01, *** p<

14 Results: Gender gap in KFS within and across income groups 14

15 Discussion People with low-income have lower levels of financial knowledge than their non-low-income counterparts. There is no gender gap in financial knowledge within income groups. Gender gap in financial knowledge is statistically significant only across income groups. Income inequality significantly predicts the variation of financial knowledge Gender gap in financial knowledge disappears while controlling for income inequality 15

16 Limitations This study contains the standard limitations of using crosssectional survey data; findings do not claim any causation. The development of the financial knowledge scale was limited to the items provided in the survey; this might not be the most efficient tool to measure the latent construct of financial knowledge. 16

17 Conclusion and Future research directions People in low-income who lack financial knowledge are vulnerable to poor financial management and financial exploitation and fraudulent. Findings on the gender gap in financial knowledge do not support existing literature, which need further investigation with different populations in different cultures. Future research can focus on identifying contributory factors for low levels of financial knowledge among people in lowincome using explanatory design. 17

18 References Fonseca, R., Mullen, K. J., Zamarro, G., & Zissimopoulos, J. (2012). What Explains the Gender Gap in Financial Literacy? The Role of Household Decision Making. Journal of Consumer Affairs, 46(1), Hamilton, D., & Darity, Jr., W. A. (2017). The political economy of education, financial literacy, and the racial wealth gap. Federal Reserve Bank of St. Louis Review, 99(1), Lusardi, A. (2011). Americans financial capability. National Bureau of Economic Research. Retrieved from Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature, 52(1), 5 44 Lusardi, A., & Tufano, P. (2009). Debt literacy, financial experiences, and over-indebtedness. National Bureau of Economic Research. Retrieved from Robb, C. A., & Woodyard, A. S. (2011). Financial knowledge and best practice behavior. Journal of Financial Counseling and Planning, 22(1), Sherraden, M. S. (2013a). Building blocks of financial capability. In J. Birkenmaier, M. S. Sherraden, & J. Curley (Eds.), Financial education and capability: Research, education, policy, and practice (pp. 3 43). New York: Oxford University Press Statistics Canada. (2009). Canadian Financial Capability Survey (CFCS). Retrieved August 26, 2014, from Statistics Canada. (2014). Canadian Financial Capability Survey (CFCS). Retrieved July 25, 2015, from Xiao, J. J., Chen, C., & Chen, F. (2014). Consumer financial capability and financial satisfaction. Social Indicators Research, 118(1),