Canada’s inequality non-problem

Posted on May 16, 2013 in Equality Policy Context – FPComment
13/05/15. William Watson

Like most wonkish organizations these days, the OECD is fixated on inequality. It has just come out with a new report on how inequality has been evolving in its 30-plus member countries since the financial crisis of 2008. The report’s title encapsulates the message: “Crisis squeezes income and puts pressure on inequality and poverty.”

“Except in Canada,” it might have added, for a lot of the trends the OECD is worried about either aren’t happening here or are biting much less. As so often, we’re not well served by living next to the world’s biggest media market. The U.S. is being hit harder by a number of these poverty/inequality trends and our policy debates are heavily influenced by U.S. concerns.

Start with growth. On average, between 2007 and 2010 OECD countries experienced minus 1.9% growth per year in market income — what you earn before paying taxes or receiving grants from government. In the U.S. the contraction was worse: 2.5% a year. But here, thanks to lots of things, including the make-up of our economy but also probably our healthier fiscal situation, we actually experienced “positive growth” of 0.8% per year. Five other OECD countries did better, including Poland, which led all countries with 3.0% growth.

“Negative growth,” or in our case the slowdown in growth, did raise inequality. Our Gini coefficient for market income (0 with perfect equality, 1 when one person makes all the income) rose from 0.436 to 0.447.

But, just as they’re supposed to do, the progressive income tax system and the welfare state more or less offset this increase in inequality. If you look at the Gini coefficient for disposable income — after transfers and taxes — it barely budged. Ours went from 0.319 to 0.320, an increase of one one-thousandth, which is basically no change. On average, the rest of the OECD countries did exactly the same as we did on this score: inequality of market income up 11 one-thousandths, inequality of disposable income up just one one-thousandth. The results for the U.S. were worse on both scores but only by a couple of thousandths.

The big story out of these numbers is that the safety net worked exactly as intended. It didn’t perfectly offset the rise in inequality resulting from the turmoil in the labour market. But it offset most of it. As we’ve seen, the growth of market income in Canada averaged 0.8% from 2007-10. But add in the effect of both income taxes that bite less as growth slows and social spending that rises with slower growth and disposable income grew faster than market income over these three years, averaging 1.6% per year.

This focus on inequality is misplaced, however. How people at the bottom are doing compared to people at the top, which is what the inequality numbers look at, isn’t nearly as important for measuring human misery or satisfaction as the poverty numbers are. People at the top are mostly well placed to take care of themselves. People at the bottom often aren’t.

Here again the news isn’t nearly as bad as usually assumed, particularly for this country. The disposable income of people in the bottom 10% of the income distribution rose at an average of 0.84% per year from 2007 through 2010. True, the disposable income of people in the top 10% rose more, by 1.53% per year. But it’s not the usual refrain of “the rich getting richer, the poor getting poorer.” The poor were actually getting richer and doing so in the worst three years of the recession.

If you look at poverty rates, by the OECD’s favoured measure of how many people are making less than half the median income our poverty rate rose: from 11.4 to 11.9%. But the OECD’s inequality economists evidently don’t think this measure produces a big enough increase in poverty for such a big economic shock so they also look at how many people in 2010 were below one-half of 2005’s median income. In many countries incomes were higher in 2005 so you’d expect more people to show up with less than half that income in 2010. Unfortunately, in Canada the result of this exercise is that the poverty rate actually falls. A smaller percentage of the population was under the 2005 half-median income in 2010 than had been in 2005.

It’s hard not to look at all these numbers (for which, apologies) and not be encouraged by Canada’s having done a pretty good job of insulating its most vulnerable citizens from the worst effects of the crisis.

Hard but not impossible. An OECD spokesman’s take on the numbers is that: “There is no reason to be complacent in Canada. Even if Canada hasn’t been as affected doesn’t mean it can’t be in the future.”

Well, yes, a social system that seems to have got us through the crisis with something approximating flying colours could come crashing down all of a sudden, like a Soyuz capsule with no parachute. But that does seem an unduly pessimistic message to take away from the exercise, even for Canadians.

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