Despite what the attack ads say, incomes at the very top have fallen since Harper took power

Posted on June 16, 2015 in Equality Debates – Full Comment
June 16, 2015.   Stephen Gordon

The increased concentration of income among a small group of high earners — the one per cent — over the past 30 years is a legitimate concern. What to do about it remains an open question: there’s still no clear consensus as to how or why this happened, so we don’t have a good handle on what governments can or should do about the surge in incomes at the top. The Liberals’ proposal of a new tax bracket for taxable incomes above $200,000 is, at least on the surface, a plausible response, although its effectiveness is debatable. Our lack of understanding of the problem doesn’t mean that we shouldn’t discuss the matter; just the opposite. But we should at least get the facts straight.

This brings us to a new TV ad being run by Engage Canada, a newly formed interest group that earnestly, if implausibly, describes itself as a “non-partisan, independent project.” Its creation appears to be a response to the formation of the anti-union Working Canadians interest group whose claims to non-partisanship seem equally implausible. As such, Engage Canada’s ads are sharply critical of the Conservatives. Unhappily for a project that has “a mandate to increase democracy and democratic participation,” its take on top-end income inequality is unlikely to improve voters’ understanding.

Here is the opening sentence of their TV ad: “Under the Harper Conservatives, inequality is skyrocketing. Income for the wealthiest five per cent has increased 12 times faster than for the rest of Canadians.”

The Engage Canada website says this startling — and wildly misleading — claim is based on Statistics Canada data for the median market incomes of the top five per cent and median market incomes for the bottom 95 per cent. I’ve been following the literature on top-end inequality pretty closely, and as far as I can tell, this is the first time that anyone has ever used those particular statistics to illustrate anything. Whenever an attack ad makes use of a never-before-used statistic to make a point, it’s worth taking the time to do some unpacking.

To begin with, the choice of market incomes — that is, income earned from wages and investments — is non-standard. Empirical studies usually look at total income (market income plus transfers from government) and if you’re going to make a point about what governments have or have not done to reduce inequality, you’d best use after-tax income, which is the end result of the tax-and-transfer system.

Top-end income shares peaked in 2006 and have been declining ever since

A more puzzling bit is the use of the median of the top five per cent and bottom 95 per cent groups. The median of the top five per cent is the 97.5th percentile — 97.5 per cent of incomes are below the 97.5th percentile — and the median of the bottom 95 per cent is the 47.5th percentile. (To give you some perspective on these numbers, the 97.5th percentile total income was $146,300 in 2012; the 47.5th percentile was $28,700). These are statistics for particular points of the income distribution, not the top five per cent as a whole or the bottom 95 per cent as a whole. To claim that these percentiles are representative of their subgroups requires additional evidence that simply isn’t there. And why the top five per cent? Why not the top one per cent, or even the top 0.1 per cent or the 0.01 per cent?

Charts on ‘Skyrocketing Inequality”: < >

More fundamentally, these data on two income percentiles don’t address the basic problem: the concentration of income at the top end of the income distribution. And when you look at the share of income that is going to high earners during the Harper government, the data are pretty clear. Regardless of what measure of income you use (market, total or after-tax) or which threshold you use (top 10 per cent, five per cent, one per cent, 0.1 per cent, 0.01 per cent) you get the same answer: top-end income shares peaked in 2006 and have been declining ever since. These shares are still higher than what they were in 1982, but to say that top-end inequality has “skyrocketed” during the Conservative government is absurd; “cratered” would be a better description. Virtually all the damage done since 1982 occurred before 2006. Incomes at the very top of the income distribution have fallen significantly since Harper took power.

In the broad-minded spirit of non-partisanship, Engage Canada assigns responsibility for worsening top-end inequality to the Conservative government. But it turns out that top-end inequality has actually improved since 2006. So by the logic of political advertising, Stephen Harper can claim credit for the decline of the shares of income going to high earners, right?

Well, no. At least, no more than Jean Chrétien and Paul Martin can be blamed for the surge in top-end inequality that occurred under their ministries. Although we still don’t have a definitive explanation for the top-end income concentration that occurred before 2006, we do have some plausible conjectures. To my mind, the most plausible is the “brain drain” theory.

As the Canadian dollar depreciated during the 1980s and the 1990s, there rose a widening gap between top-end Canadian salaries and U.S. salaries expressed in Canadian dollars. To the extent that a highly skilled Canadian worker could credibly threaten to accept a higher-paying U.S. position, Canadian employers would be obliged to match those offers with ever-higher salaries. The trend would reverse itself as the Canadian dollar appreciated during the resource boom. A stronger dollar reduced the gap between U.S. and Canadian high earners, and so would weaken whatever bargaining power that could be leveraged from the threat of moving to the U.S. Jean Chrétien can’t really be blamed for the depreciating dollar while he was in power, and neither can Stephen Harper be credited for its appreciation.

This isn’t an argument for complacency; just the opposite. If this story is correct, there’s a real danger that the recent depreciation in the value of the Canadian dollar will lead to another episode in which high earners will try to use the threat of outside offers from the U.S. as leverage for increased salaries.

If you’re going to make the point that top-end income inequality is worth worrying about, it’s worth making an honest effort to understand the facts, and to consider the possibility that maybe, just maybe, your political opponent may not be at fault.

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