Income inequality in Canada: What’s the problem?
TheGlobeandMail.com – news/national
Nov. 18 2013. Konrad Yakabuski
Globe and Mail columnist Konrad Yakabuski led a discussion with five of Canada’s leading experts about this country’s income gap and what can be done about it.
- Kevin Lynch is vice-chair of BMO Financial Group.
- Anne Golden is distinguished visiting scholar at Ryerson University.
- Jim Stanford is an economist with the trade union Unifor.
- William Robson is president and CEO of the C.D. Howe Institute.
- Miles Corak is a professor of economics at the University of Ottawa.
Konrad Yakabuski: Is income inequality a big problem in Canada? Or have we imported this debate from the United States, where inequality really is a big problem?
Anne Golden: Income inequality is, indeed, a serious issue for Canada. While the actual gap between the rich and the rest is far greater in the U.S., inequality is growing faster in Canada than in most peer countries. The biggest jump in Canada’s inequality occurred from 1994 to the early 2000’s. Too much inequality is bad for society and the economy.
Kevin Lynch: Rising income inequality is a real issue in Canada, as it is in many countries, but the reality of Canadian income inequality is quite different than that in the United States. We must guard against importing perceptions from the U.S., and make sure we understand the Canadian facts.
William Robson: Statistics Canada’s figures on real incomes by quintile show gains since the mid-1990s for each group, and the shares of each group – whether we look at pre-tax or after-tax incomes – have been remarkably stable. Many young people are doing less well, and worries about retirement are common in the middle class, but the dismal U.S. headlines do not reflect Canadian reality.
Anne Golden: I don’t agree that the shares of each group have remained stable. Since 1976, only the richest group of Canadians – the top 20 per cent – increased its share of national income. All other groups lost share. In fact, the top 1 per cent of Canadians took home a third of all income growth from 1998 to 2007. The average income of the poorest quintile, after accounting for inflation, taxes and transfers, grew by just $2100. The real incomes of the top quintile grew by 13 times as much! For sure, the pattern is worse south of the border, but our income inequality is growing and it is a problem.
Jim Stanford: The U.S. has the most unequal society of any industrialized economy. So saying that “things may not be perfect, but we have done better than the U.S.” is not exactly a claim to fame. Instead of comparing ourselves to the outlier, let’s compare ourselves to the broader set of industrial economies. On those grounds, income distribution in Canada (measured variously, such as the ratio of top-to-bottom incomes or the Gini coefficient) is relatively bad. And inequality in Canada has gotten a lot worse since the 1970s, with economic and human costs that we all experience. So we could clearly do a lot better at sharing the wealth, and building true shared prosperity.
Miles Corak: It is certainly the case that income inequality has increased in Canada, not as much as in the United States, but certainly more, as Jim has stressed, than in many other countries. Particularly notable has been the rise in the share of income going to the top 1 per cent. Whether this is a “problem”, however, is an open question. Whether public policy should be addressing the rise in inequality depends upon the underlying drivers, what can effectively be done about them, and, most importantly, it depends upon the consequences and costs of higher inequality.
EXPECTATIONS vs. OUTCOMES
Konrad Yakabuski: Clearly middle-class income growth has not matched middle-class expectations, but can we honestly say average Canadians are materially less well off than they were 30 years ago? That there is more poverty in Canada?
William Robson: The Statistics Canada family-income figures I just mentioned start in 1976 and currently run to 2011. They do show bad news from 1976 to the mid-1990s. But the news after 1996 is way better – real gains across the board, and a growing market-income share for the bottom fifth. Poverty rates are down in Canada – again, a key contrast with the United States.
Miles Corak: Roughly speaking, middle-income households are not much, if at all, better off than 30 years ago. They are now working harder and relying more on government transfers to maintain the same standard of living. The starting salaries of each successive cohort of young people entering the labour market are lower. Poverty is another thing altogether, and though it has fallen when compared to 20 years ago, this is cold comfort.
Kevin Lynch: As Sergeant Friday used to say: “The facts, nothing but the facts.” And the facts suggest that income inequality worsened in Canada, as measured by the Gini coefficient by about the same percentage as the OECD countries on average, and the deterioration actually happened in the second half of the 1990s, not in the last decade. Over the last decade, median real disposable income rose in Canada by about 20 per cent compared to a decline of 4 per cent in the U.S., and the ratio of the top 10 per cent to the bottom 10 per cent declined slightly after rising in the 1990s. Within these statistics, there were increasing market returns to those with better education, and pressures on middle class workers as the nature of work changed.
Anne Golden: The point is not that the middle class and the poor in Canada are not worse off than they were 30 years ago. The point is that the incomes of the middle class have stagnated. The average income of the middle quintile grew by just 6 per cent in real terms in over a third of a century. Nor is the point that the poor are not worse off. It’s that they are not much better off, despite a period of significant growth in incomes. The point is that it is top fifth of the population who reaped the benefit of this growth. And the effects of this can be seen in a shrinking of the number of middle class neighbourhoods, as rich and poor grow further apart.
Miles Corak: It is also important to appreciate that this picture cannot be brought into focus by relying on any statistic. The Gini coefficient, by its very construction, is not sensitive to changes in the extremes of the income distribution and so does not fully capture the impact on inequality of rising income shares being captured by top earners. Over the last decade inequality continued to increase, but the nature of the increase was different, reflecting a pulling away of the top tail of the income distribution.
Jim Stanford: How low we set the bar: Despite the advent of incredible technology. Despite a 50 per cent increase in average labour productivity. Despite the mass entry of women into the paid labour market. Despite all these things, the real income of the truly “middle” household (the median family) has not budged in more than 30 years – and even that is due to the impact of government in moderating the strong polarization of market incomes. And yet some claim this as a “victory.” Most Canadians have been completely sidestepped by the benefits of economic progress for a generation – precisely because of the erosion of the institutions designed to share the wealth (like income security, collective bargaining, and progressive taxation). Real incomes for the richest 1% doubled in the same period, and real incomes for the super-rich (the top 0.01%) tripled. So by the definition of relative poverty (being worse off than those around you … and, in this case, much worse off than those you read about and see on TV), poverty has indeed increased in Canada.
William Robson: Since we are making such different claims about the trends, I’m quoting Statistics Canada’s household incomes, adjusted to an individual basis to correct for how the average household is getting smaller over time. Between 1996 and 2011, the after-tax-and-transfer figures do show average incomes in the top quintile outpacing the others. But they also show average incomes in every quintile up more than 30 percent over the period – not a bad performance, and much better than what came before it.
Jim Stanford: Adjusting the data for the size of household is problematic for several reasons. First, household expenses per capita are higher for smaller households, so claiming that families are “richer than they feel” because there are less people in each household is not very comforting. Second, to some extent households may be smaller precisely because incomes have stagnated, so there is a circularity in the causation. Third, while average household size has declined, average household paid working hours did not.
William Robson: Adjusting for household size makes sense for exactly the reason Jim mentions – two may not be able to live exactly as cheaply as one, but more people under one roof does save money. As any parent who has had a strapped kid move back in knows, stagnating incomes are likelier to put more, not fewer, people under each roof. Average household size has been shrinking since at least the beginning of the 1960s, which includes an earlier period of very rapid income growth. It seems that one of the benefits of rising living standards is that people are able to live more independently.
Anne Golden: Bill is arguing that all income groups saw their income grow from 1996 to 2010. This is correct. However, the top group grew way more than the bottom or middle groups. To me, the important point from a societal point of view is that the top group is growing much faster than the rest. So that the shares of the income pie are shrinking for four out of five income groups.
Konrad Yakabuski: Kevin Lynch’s research shows that, while pre-tax income inequality in Europe is generally higher than in Canada, many European countries have lower after-tax inequality. So, is there more do be done in Canada via the tax system, without resorting to a counterproductive “tax the rich” strategy?
Anne Golden: Yes, there is room to modify the tax system without it becoming counter-productive.
Jim Stanford: It hasn’t been established that “taxing the rich” is counter-productive. Many European countries have much higher personal taxes than Canada, and yet have done better than Canada in motivating business investment, innovation, productivity growth and exports.
Miles Corak: The tax system actually played a major role in undoing the rise in market inequalities up to the mid 1990s. This suggests more could be done now. There are many ways in which the system can be made more equitable and more efficient, and these steps should the first ones taken while at the same time recognizing that tax policy cannot be the only way of addressing the very profound labour market changes that are the ultimate drivers of disparities in incomes.
William Robson: We should look at taxes and spending together: How we spend the money matters as much as how we raise it. Hiking income taxes at the top end can certainly lower top incomes, but tends to raise disappointing amounts of revenue. We can do more for people with low incomes by taxing more robust bases – as the GST does – and using the revenue for income supports and working-income supplements.
Kevin Lynch: In looking at the toolkit available to respond to income inequality, there are both tax and spending options available depending on the nature of the specific problem. We should also always ask ourselves whether the best approach is to increase redistribution or to increase opportunity through the provision of public goods like education.
Konrad Yakabuski: Economist Tyler Cowen’s new book,Average is Over, posits that the United States is becoming a “hyper-meritocracy” where only the most technology-savvy workers thrive, leaving everyone else in low-wage jobs. If this is at all applicable to Canada, isn’t it unrealistic to think we can make much of dent in income inequality if bigger economic forces are work?
Jim Stanford: The situation that Cowen describes is hardly a meritocracy. Lucky individuals do not take a place among that small, well-off group because they somehow deserve it. And there will be many millions of tech-savvy workers who are as poor and insecure as any of the rest of us – by virtue of their skills being subject to automation or offshoring. I do suspect that absent deliberate efforts to support mass prosperity, a situation much like what Cowen envisions will emerge. But the causation at work is not merit, it’s power. The top 1-2 percent will do extremely well thanks to their financial wealth and control over businesses. Another 10-15 percent will do fairly well thanks to (at least temporarily) unique skills or characteristics, proximity to those with wealth, or other fortunate factors. The rest of society will scrape by, and what we know as the middle class will largely disappear. There’s nothing inevitable or “economic” about this trend. It all reflects deliberate policy and political choices that have been made: about how we collectively choose to regulate our business , trade, and employment relations. Different choices in each of these domains can also be made.
Miles Corak: It becomes doubly important that having a good start in life, getting a quality education, and being able to compete farily for the best jobs not depend overly on family background. One of the most significant downsides of higher inequality is that it has the potential to shape opportunities, giving children of rich parents disproportionate advantage. It is important that equality of opportunity be promoted in an era of high inequality, that child care, health care, and schooling continue to serve the relatively disadvantaged.
Kevin Lynch: The OECD raises the same general issue as Cowen. Technological change is essentially bifurcating work. There is a hollowing out of the middle. Part of the response is upgrading skills and education. Part of the response is more innovative firms, moving up the value added curve in every sector, and paying higher wages as a result.
William Robson: The idea that technological change multiplies opportunities for high-skilled people is pretty persuasive. Schools and postsecondary institutions that help people acquire skills are part of the answer. We know that higher education is a great personal investment for Canadians. And while I do worry that the world is getting increasingly hard for low-skill people to navigate – just think of doing personal income taxes! – as one of the less gloomy members of this panel, I’ll point out that some technological advances are all about making gadgets easier for people who are not geniuses.
Anne Golden: Lots has been written on how the new digital world is creating a greater divide economically for people. To say that this trend should cause us to give up on trying to create a more equitable society, in which most people can find opportunity and succeed, is surely wrong. Enlightened policies are needed to address this challenge.
Konrad Yakabuski: Is Canada’s education system up to the task, both in ensuring those in need of special attention get it, and in equipping students with 21st century skills? Or is government spending on aging baby-boomers crowding out our investment in the young?
Anne Golden: The issue is not either-or. I can’t say whether the entire education system is currently up to the task, but I can speak very personally about some very inspiring innovation in education that I see at Ryerson University. The Digital Media Zone, where young entrepreneurs incubate and grow their businesses, is achieving astonishing results.
Kevin Lynch: Dynamic economies and societies typically go hand-in-hand, and a key element in creating that dynamism, is a strong and innovative public education system. A public education system that instills creativity and entrepreneurship as well as knowledge; one that provides excellent post-secondary educations and world-class, research capacities; one that trains for skilled trades as well as for professions; and one that understands the value of experiential learning for students and for employers. We have a good public education system in Canada but we should aim higher, and make education one of Canada’s core competitive strengths in a demographically challenged world.
Miles Corak: The Canadian education system, from kindergarten to college, is something to be celebrated. It is a major positive contribution to social mobility, and its accomplishments are reflected in the high standing of Canadian children in international assessments, with the achievements of the children of immigrants being particularly notable. In an era of higher inequality it is important that the rich not opt out of the system, or infuse it with a competitive ethos that stresses rank, position, and the demands of the marketplace over an ethos of community that offers all children, regardless of their socio-economic status, the opportunities to become all that they can be. Countries like the United States and the United Kingdom, where inequality is higher and social mobility lower, have a lot to learn from what Canadians have accomplished.
William Robson : Canada’s elementary and secondary schools do a good job by world standards. We also measure student achievement carefully by world standards. So we know a lot about how achievement and its correlations with socio-economic status vary from province to province, which can help us figure out how to do better. We also have strong post-secondary education. I agree that Canada’s education system does a lot to equalize equality of opportunity: it’s a major asset in confronting the technological and skills challenges ahead. As for government spending on older Canadians, it is already squeezing budgets, and that pressure will intensify as more baby-boomers who work for government start to collect their pensions and all boomers become heavier users of publicly funded health care. We do see evidence that younger Canadians are lagging the boomers economically, and I worry about the burden we have already placed on the next generation. Intergenerational fairness should be a key test for potential policy changes.
Jim Stanford: I am a huge believer in public education, and we should collectively spend more on it. But don’t hold your breath hoping that education will moderate the rise in inequality. A greater share of Canadians already have higher education than in any other nation. That didn’t stop the income gap from growing. And a large share of new jobs in the future will not realistically require higher education at all. Among the career categories expecting the biggest increments in new positions are truck drivers, health care aides, and retail workers and managers. So unless we start paying truck drivers, health care aides, and retail workers better, the current trajectory will not change, no matter how well educated Canadians become.
Anne Golden: I agree with Jim that the employment structure forecast going forward does not bode well for reducing income inequality. Compensation change is part of the answer. But also, our becoming more of an innovation nation can create new opportunities with higher income possibilities.
Konrad Yakabuski: Say you’ve just been appointed as Canada’s new Minister of Equality of Opportunity with a mandate to allocate the proceeds from an “equality surtax” on the 1 per cent. How will you spend the money? Will you supplement the wages of low-income workers? Create a national daycare program?
Anne Golden: You won’t be surprised that my first priority, as the past chair of the Homelessness Task Force, would be social housing. Without secure housing it is impossible to have a normal life. This would target the funds to those most in need – single parents, Aboriginals and immigrants.
Kevin Lynch: As a life-long public servant, I would only aspire to be the Deputy Minister. My advice would be to create opportunity by stimulating both supply and demand factors. Supply can be enhanced by investing strongly in a public education system managed for student success from K-to-Work, with more emphasis on innovation, more managing for outcomes and results, and more input from the “consumers” of the system. Demand can be improved by building a more innovative and entrepreneurial economy, where many of the interesting new jobs will be created by globally orientated start-ups in all sectors.
Jim Stanford: First off, government doesn’t have to spend a cent to start to address inequality. I would implement wage-boosting measures like the minimum wage, collective bargaining, sectoral wage standards to address the effects of precarious work. Pushing employers to stop devaluing work will do more for inequality in the long run, than trying to offset the social consequences of low wages through public subsidies. Then, with the surtax , I would target two measures: expanding the child tax benefit, and revitalizing supports for affordable housing.
Miles Corak: My priority would be to reduce inequality in the lower half of the income distribution, while maintaining strong work incentives. I would enhance the Working Income Tax Benefit, an earnings supplement to those currently earning more than $3,000, tapering away and paying nothing to those making more than $10,000. A much more generous program would probably also require concomitant increases in minimum wages, should there be a tendency for employers to lower the wages they may offer.
William Robson: A 1 per cent “equality surtax” might yield $800-million. That could almost double what Ottawa spends on the Working Income Tax Benefit. Two ways to spend that money would be to raise the threshold where the WITB’s clawbackstarts and make the clawback less fierce. Clawbacks make the effective tax rates on low-income earners very high.
Anne Golden: I would support that.
Konrad Yakabuski: If Anne and Bill agree, I think we’ve made some progress. Thank you all for an illuminating discussion.
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