The myth of income inequality: Since the bleak 90s, things have actually gotten better
NationalPost.com – FullComment
13/09/02. Andrew Coyne
By now the themes have been well established, through sheer repetition: stagnating real wages; the forgotten middle class struggling to keep up; the poor falling ever further behind, while the rich — why, even they’re falling behind, if by “rich” you mean anyone besides the top 1%.
We used to think of the poor when we spoke about “inequality.” Later, it came to mean something broader, the stark division of society into haves and have-nots, without an intermediating middle class to bridge the gap. Happily, it now applies to just about everybody: 99% of the population is now considered to be in a state of relative deprivation.
A society in which the fortunes of the broad majority have ceased to improve will perforce be an unhappy one
As such, inequality has become the obsession of the age. At least two opposition parties hope to capitalize on the issue in the next election. A Commons committee is beavering away at a report on it. Academics have never been busier. Modesty forbids commenting on my own industry’s contribution.
All of these are legitimate issues, in principle. A society in which the fortunes of the broad majority have ceased to improve will perforce be an unhappy one; a society with swelling numbers of the poor damn well ought to be. If income is increasingly concentrated among a permanent elite, it raises fundamental, and troubling, questions: whether social mobility is real, whether merit is rewarded, whether democratic government is even possible. A divided society is a recipe for social strife, if nothing else.
And, indeed, all of these were growing problems in Canada — twenty years ago. It was in the 1990s, generally remembered as a golden age of rising incomes and enlightened, liberal-minded governments, that things really looked bleak. Until well into the 1990s, the numbers living in poverty (Statistics Canada prefers to call it “low income”) continued to mount, peaking at over 15% in 1996. Real wages barely grew at all. Median family income fell through most of this period — from a peak of nearly $50,000 in 1980s, real after-tax income had dropped to just $40,000 by the mid-1990s: while the share of taxable income going to the top 1% rocketed skyward: from 8% in 1980, to 12% in 1998.
But since then? On every one of these measures, things have gotten better — or at the very least stopped getting worse. In every case, there is a kink in the data around the mid-to-late 1990s: steadily deteriorating up to that point, they either turn around or level off afterward. But don’t take my word for it, have a look at the charts.
Poverty, first, where the news is quite remarkably good. The chart shows the proportion of the population living below StatsCan’s Low Income Cut-Off (LICO).
As you can see: rising before 1996, falling ever-after. Notwithstanding the recent recession, today it’s at an all-time record low. Not only are there fewer people living in poverty overall, measured against a constant real-dollar benchmark (the “1992 base”), but StatsCan reports they are spending less time there, on average, and on relatively higher incomes relative to the LICO.
Well, that’s all right for them. What about the middle class? (See median family incomes chart.)
The three lines are for market (ie earned), total (ie including government transfers) and after-tax income. In all three cases, the pattern is repeated: steadily worse before 1998, steadily better after. To be sure, incomes, though at all-time highs, are only slightly better now (slightly worse, in the case of market incomes), coming out of the 2008 recession, than they were at their pre-recession peak in 1980. But that apparent “stagnation” obscures the two very different experiences in between.
Also worth noting: the “forgotten middle class” is already benefiting from the redistributive hand of the state. Prior to 1998, median market income typically exceeded after-tax income, meaning those families were paying in, on net; after 1998, the reverse is true.
But it isn’t just about government handouts. Real wages (a reminder: that’s after inflation) also started growing in the 2000s, after years of flatlining. That’s more true for women, admittedly, than it is for men. (see average hourly wages chart). Men’s wages barely grew at all from about 1985 through 1998, and have only climbed modestly since then. Women’s wages, meanwhile, have climbed steady throughout — though both groups’ wage gains accelerated after 2005. The combined effect has been to narrow the gap betwen two: where women earned just 74 cents for every dollar a man earned in 1981, by 2011 that had closed to to 87 cents. And while real wages for both men and women declined slightly in 2011, they remain very near their all-time peak.
What about inequality, then? One traditional measure is to look at the share of income going to the various “quintiles,” the bottom, second, third, fourth and top fifths of the population, ranked by income. (See market income – quintile shares chart.)
Again: a noticeable increase in the share going to the top 20% before 1998, no change after. The picture is broadly similar if you look at after-tax incomes (see income after taxes and transfers chart).
If we set the average income for each quintile to 100 in 1976, we can see how each made out in the decades that followed (see relative income gains chart). The figures are for market incomes, without taking into account the leavening influence of taxes and transfers. Even so, while everyone’s incomes have been climbing since the mid-1990s (even the rich were losing ground before then) the bottom two quintilles have grown the fastest — faster even than the top group!
Another index of inequality, called the Gini coefficient, measures how far the distribution of incomes deviate from equality, along a range from zero (perfect equality) to 1 (perfect inequality). (See income inequality chart.)
Once again: growing until 1998, flat ever since.
Why did things get relatively worse through the 1980s and 1990s, and why have they done relatively better since? The most obvious explanation: we went through two very nasty recessions, in the early 1980s and again in the early 1990s. Unemployment rose sharply, meaning many more people than usual were earning no income. That not only raised the poverty rate, but it dragged down median and average incomes as well. But from the middle 1990s through to 2008, the economy grew steadily, and all these trends reversed themselves.
That doesn’t mean we shouldn’t be concerned about them. But it’s simply not true that inequality is growing worse, or that incomes have stagnated. It was true in the past; it is not now. Yet in the 1990s they were a non-issue, and today we can talk of nothing but.
Yes, yes, you’re saying, but what about the 1%? What’s happened there? Here are the most recent figures, as compiled by McMaster University’s Michael Veall:
As Veall notes in a recent paper, “the surge did not continue smoothly after 2000.” No indeed: after growing steadily in the previous two decades, the share of income going to the top 1% in Canada was no higher as of 2009 than it was a decade earlier. To be sure, this was after the 2008 recession: perhaps, having fallen for the last two years, it will resume growing again. No one knows. But again, why was this not an issue, when it was unambiguously on the rise, but is all the rage today, when it is falling?
Possibly it reflects the influence of U.S. media. Poverty is at record highs in the United States; median incomes really have stagnated there; the share of income going to the top 1% has grown to levels far beyond anything experienced here. It is not unusual for people to think trends happening elsewhere must also be happening here.
Or perhaps it’s just a kind of latency: maybe it takes a couple of decades for events to sink in, before we start to protest against the things that were happening in our parents’ day.
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