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Inequality and social mobility

May 2, 2012

[These are the opening remarks I made to the Senate Standing Committee on Social Affairs, Science and Technology of the Parliament of Canada. I appeared as a witness at the May 2nd meeting of the Committee dealing with Social inclusion and cohesion in Canada to address the topic of inequality. These remarks do not substitute for the official transcripts that will be produced by the Standing Committee.]

Thank you for the opportunity to engage with you on a topic that is of increasing importance to the well-being of Canadians, inequality in earnings and incomes. I would like to convey three major points in these opening remarks.

First, there are three separate and related developments behind the increasing inequality of earnings and incomes in Canada, each being the outcome of a particular set of inter-related factors. If public policy is being crafted to address inequality it needs to be aware of each of these, and of their underlying determinants.

Inequality has increased because those in the lower part of the wage distribution—often with less education and other skills— have not experienced significant if any increases in their earnings.

Inequality has increased because those in the upper end of the wage distribution—often those with above average levels of education and more job experience—have seen increases in their earnings.

And finally, inequality has increased, to some very important degree, because those at the very upper end of the wage distribution—the top 1% and even the top 1/10th of one percent—have experienced significant increases in their earnings.

Technical change associated with the informatics revolution, increased international trade, and the associated long-standing shift of jobs from goods production to service provision underlay, in some measure but in different ways, all three of these developments.

As a result, and this is the first major point I would like to convey, public policy needs to address each of these developments in different ways if it is to reduce the growing inequalities in our labour market.

But this makes the assumption that inequality is something that requires public policy intervention. In fact, I share the opinion of many reasonable observers who believe that a certain amount of inequality is a good thing. It offers both the incentives and the opportunity for individuals to improve their material well-being, and in this way promotes economic growth in general.

More inequality is a good thing, but only to the point that it does not erode opportunity. The second major point I would like to convey is that more inequality is in fact associated with less opportunity.

I would bring to your attention a picture of this association drawn from the Economic Report of the President, issued by President Obama’s Council of Economic Advisers earlier this year.

This picture offers a comparison of 12 relatively rich countries along two dimensions: moving horizontally from left to right represents a movement to higher and higher inequalities as measured about a generation ago; moving vertically from bottom to top represents a movement to lower and lower degrees of economic mobility across the generations as measured by the proportion of a father’s economic advantage (or for that matter disadvantage) that is passed on to his adult son.

As you can see Canada has moderate levels of inequality, but rather high levels of generational earnings mobility. The latter reflects the way in which we cared for and invested in our children a generation ago. Families, their access to secure income through employment in a robust labour market, and public policies that were of relatively more advantage to the less advantaged all played a role.

The reason I feel that it is important to be thinking and discussing current labour market inequalities is because they will likely influence the degree to which we will be able to continue to care and invest in our children. More unequal societies have greater challenges in doing so because families are under greater pressure, the less advantage have more difficulty in obtaining a reasonable and secure income level, and political discourse and institutions begin to change in a way that is less progressive.

Finally, the third major point I would like to convey concerns the impact of the recent recession on the degree of social and economic mobility. My own view is that the recession has likely not altered social mobility that much in Canada, and that we should keep our eye on the medium to longer term forces.

This point is probably best made by contrasting the Canadian experience with that of the United States.

We know that when a long tenured worker suffers a permanent layoff his or her earnings decrease significantly and never return. This happened to many people in Canada during the recession, but much more so in the United States. A permanent fall in life-time earnings erodes the capacity of parents to invest in children

Further, a large part of the wealth of many families is embodied in their homes. Significant losses in wealth associated with the housing market also erode the capacity to invest in children. In addition the loss of a home may require residential moves and changes in neighbourhoods and schools. These all imply important challenges for children depending upon their stage of development. This happened to some extent in Canada, but much more so in the United States.

Finally, to the extent that the recession implied significant changes in public investments, particularly public schools, due to deficit cutting then in this way it could also have negative implications for relatively disadvantaged children. This has not happened yet to any important degree in Canada, but it has in the United States where public schools are locally financed and certain states have come under important pressures to curtail some public services.

8 Comments
  1. Great post. I would question you somewhat on blithely discounting inequality as OK but only as far as it reduces opportunity. Inequality can affect social inclusion, leading to adverse health and social outcomes well beyond opportunity, as Wilkinson and Pickett have detailed.

    Plus greater inequality in the name of economic growth, which in the current context means more extreme environmental destruction, is a bad argument. The biggest per capita emitters are the richest households; the poor have already met their Kyoto target, as Lars Osberg has noted.

    • Thanks for the feedback, which I certainly think is appropriate — though it remains an open question as to the degree to which Wilkinson and Pickett have described causal relationships as opposed to just associations. This said others have looked more closely at these gradients (for example Janet Currie and co-authors in the American Economic Review) to suggest that there is a causal underpinning to the raw data.

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