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“Canadian Inequality: Recent Development and Policy Options”

May 30, 2012

While inequality in Canada has increased over the course of the last three decades, the tax and transfer system can significantly reduce disparities in market incomes. But the political will to use the tax system may be limited, and public policy needs to address underlying labour market developments if it is to pursue an agenda of greater equality.

This is one of the major themes arising from a recently released discussion paper by a group of labour economists from the University of British Columbia: Nicole Fortin, David Green, Thomas Lemieux, Kevin Milligan, and Craig Riddell.

In Canadian Inequality: Recent Development and Policy Options, published by the Canadian Labour Market and Skills Research Network, they show that from 1980 to about the mid 1990s inequality measured after taxes and transfers had not increased at all in spite of more unequal labour market incomes.

During this period the tax system, particularly at the provincial level, became more progressive and neutralized labour market trends. This was the result of more generous social assistance payments and higher surtaxes on the rich.

After the mid 1990s this stopped as progressive policies were reversed. As a result labour market inequalities became more clearly reflected in take-home pay.

The authors suggest that “while taxes and transfers can work to reduce inequality, the political will to address persistent increases in earnings inequality through these policy tools alone may not exist…”

In fact, a significant part of growing inequality has to do with the share of incomes earned by those at the very top. To be in the top 1% in Canada an individual must earn about $230,000 annually, implying that on average 1 percenters earn about $450,000 compared to the country-wide average of $36,000.

Over 80% of those in the top 1% are men and the majority hold a university degree. In contrast to the United States, only 10% work in finance, and while the largest fraction are CEOs and senior managers at 14% the only other occupation of significance are physicians who represent not quite 12%.

The authors go on to discuss some of the underlying explanations for these developments, and what they see as policy options to address inequality, options that use the tax-transfer system—including raising the top marginal tax rates to 50% or even more—but also those addressing the underlying labour market structures and institutions.

But they leave the politics of public policy aside, only briefly making the link between the growth in inequality as a result of the higher share of income accruing to the top 1%, and the erosion in the political will to use more progressive taxation.

Given that the top 1% are a more diversified group than in the United States, where the finance industry and issues of corporate governance are more salient, then “policy measures such as a new tax on ‘the rich’ would mostly target people who are neither top executives nor financial professionals.”

The major objective of the paper is to offer an accessible summary of the major facts, explanations, and policy options dealing with inequality in Canada, recognizing that these themes play out differently in this country than elsewhere.

This may be one reason why the paper also leaves some important themes—particularly the relationship between inequality and opportunity that have been central to US and UK discussions—untouched.

Canada is generally seen as a more mobile society inter-generationally, with a weaker tie between parent and child earnings than in the US or the UK.

But this reflects the nature of labour markets, families, and how progressive government policy was a generation ago. If higher inequality can erode support for progressive tax and transfer programs, then one has to wonder if it will also over time change more broadly the balance between market, family, and state—and therefore the degree of social mobility.

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13 Comments
  1. Ron Wray permalink

    Miles, excellent column as always.

    Recognizing that you are an economist and income/wealth and transfer/redistribution is the natural focus of your discipline and research, are there any sociologists in Canada examining the non-income factors that might be changing and contributing to the observed increases in inequality?

    For example, building on the work of Bourdieu on cultural capital and social capital and how social class replicates and excludes. Of course, Bourdieu also included financial capital and the intersection of the three capitals – but right now most of the emphasis seems to be on the third construct of financial.

    For Canada, I think there are some interesting questions to explore to how the mechanisms of class replication (or the inverse, social mobility) might be changing in regard to universities. While not a full “public good”, the structure of universities in Canada in the post-war Boomer era more than likely helped contribute to the strong positive income mobility outcomes you and others have tracked and compared internationally. And to a greater degree, Canadian universities and governments have maintained a semblance of balance and accessibility – lacking the equivalent of an “Ivy League”, Oxbridge or École system in this country. (Viewing such educational streams as less about educational quality and more about the transfer of cultural capital and building of social capital).

    Over the last two decades we are beginning to see the emergence of elite post-secondary streams, MBAs in particular, where tuition costs are inflated compared to most graduate study. So this calls into question whether our focus should not be just focused on general tuition levels and include more emphasis on the differentiation in tuition levels for specialized professional streams in Canada.

    What are effects of these specialized elite programs, how does access differ in relation to income class, and do they suggest the growing emergence of a post-secondary specialized mechanism of selection in social class terms? Consideration to such early questions might become critical in the future if universities such as UofT, McGill and UBC strive to turn their ‘reputation’ and quiet social selection into a quasi-Ivy League through tuition differentiation.

    Might there be an opportunity to opening the door to collaboration between a fine economist such as yourself and a sociologist? :-)

    Ron Wray
    (formally Ontario Ministry of Health and Long Term Care)

    • Thanks very much for these insightful comments Ron. It is certainly clear that issues of this sort can only be fully appreciated by different perspectives, and I agree with you that the education system is a key element in mobility, or the lack of it. In fact, I do collaborate with sociologists and political scientists. But whether there is formal collaboration or not, just as importantly we—and I don’t mean just labour economists—should be reading more widely.

      I also agree with you that there is a need to look more closely at the diversity of education experiences across fields of study and discipline. That is a good point. Often our analyses are conditioned by the data that is available, but I think there are examples of some research that moves along the lines you are suggesting.

      The kind of trends you are describing are important for how things play out in Canada in the future. But for discussions of mobility it is important to link them to family background, and to be certain that entrance requirements, tuition fees etc don’t favour those with more advantaged backgrounds. As you suggest this is an important part of current discussions on social mobility in the United Kingdom.

  2. Ron Wray permalink

    Sorry, not to imply you are working in a disciplinary silo. Just expressing a generalized desire to see more explication of the specific mechanisms in sociological terms.

    Yes, I have been following the Nick Clegg social mobility discussions. You even made The Guardian! Thumbs up. :-)

    Where is Corak, Miles, and Ali Ghanghro going to be published?

    I find this most interesting – and linked to some of the work we tried to undertake at the MOHLTC. Our unstated health goal was “hope” – that hope and opportunity for meeting personal expectations is a powerful force in health behaviours and health outcomes. Certainly measurement of life satisfaction would be suggestive that hope and expectations are be met for a certain percentage of population, and is correlated with income inequality. Not a surprise per se, but nice to see some empirical verification.

    • Oh goodness, my apologies Ron. I certainly did not take any offense from your comments. To some degree specialization is natural and important, but I agree that having the conversation across disciplines is equally as important.

      The paper with Ali, a former MA student, is in a draft stage and needs to be re-written … this is on my to-do list for the summer

      best, m.

  3. A.G. (engaged citizen) permalink

    Hello,

    I found your site looking for in-depth discussion of this article.

    Two points struck me as not being sufficiently addressed in most discussions.

    1. While only 7.1% are professionals in business and finance, 14% are senior management and 19.1% are “other management”. Not sure what that means (public service managers?), but that’s about 40% in management, business or finance. Only 11.6% are in health. That leaves the other 43% unaccounted for – entrepreneurs, technicians or tradespeople in high demand industries, such as the oilsands or mining? In note 9, the authors note that the “super rich” in the U.S., the top 0.1%, are disproportionately executives and financiers. Occupy’s slogan might have been catchy, but maybe it should have been “the 0.1% vs the 99.9%”. Lumping together the 1% may not be very helpful when the problem isn’t the people earning $340,000, but the 0.1%. millionnaires and billionnaires raising theaverage to $450,000. Would like to see more details on the situation in Canada.

    2. The most striking point seems to me to be the role of technological change vs education. According to this argument, it is routine tasks that are automated or offshored, i.e. formerly middle class jobs, resulting in polarization of the workforce, i.e. “hollowing out” of the middle class. This creates more demand for skilled workers and downward pressures on lower wages. More higher education may not be the answer though, as this induces firms to choose high skilled intensive technology, reducing demand for low skilled workers, thus increasing inequality. (pp. 11-14, 25-26).

    3. Is the problem inequality of income before or after tax?

    4. Personal vs family income. This often gets confused in discussions. The increase in single-person households vs “assortative mating” would certainly add to inequality but is left unexplored. (p.19-20)On p. 7, the authors confusingly say “for this analysis, we switch the focus from families to individuals”, yet do nothing of the kind that I can see.

    Comments?

  4. Hi A.G.,

    Thanks for your comments. Here are some responses.

    1. There is definitely a change in mix as you go up the top 1%. Top professionals (accountants, lawyers, doctors) are in the bottom half of the top 1% but not so much in the top half. More finance and top executives in the top half of the top 1%. The ‘entrepreneur’ thing is wrong though–the proportion of earned income is higher in the top 0.01% than in the top 1%. Around 75%, IIRC. The top income folks are *employees* for the most part.

    2. Interesting comment.

    3. Both. In the 1980s, pretax inequality rose, but the tax system became much more progressive under the PCs (yes, you read that correctly) so after-tax inequality stayed pretty much flat in the 1980s. In the 1990s, pretax inequality continued to rise but the tax system became less progressive. You can find papers documenting this by me along with Green and Frenette on my website.

    4. Assortative matching certainly has increased, and has contributed to family-income inequality, but not nearly as much as the rise in earnings at the top has contributed.

    5. We do switch from families to individuals. The first section using ginis etc. has family size adjusted family income. But in section 2 we look at individuals. The results in section 2 relate to individuals and we introduce the section by saying we are switching to individuals. I’m happy to hear suggestions how we could make that more clear.

    Thanks again for your comments, AG.

  5. A.G. (engaged citizen) permalink

    Thank you both for your responses.

    I guess my main question has to do with the causes, and possible remedies, for the structural inequality implied in point 2 (which is only a restatement of the point made in the article). Measures to alleviate after-tax inequality, such as more progressive taxation, are good, but surely that is only a palliative, while it would be preferable to attack the root causes of pre-tax inequality. And according to this theory, the most universally popular cure-all, more higher education for all, would in fact make things worse? What policies might be a solution to that “hollowing-out”? The alternative, a society with a huge gap between the highest and the lowest incomes and skills, alleviated by taxes and wealth transfers, seems pretty grim – much worse than simply a gap between a large middle-class and a few very rich people at the top…

  6. A.G. (engaged citizen) permalink

    Re.: the difference between individual and family income.

    On p. 3, the Gini discussed is clearly described as related to family income, then on pp-5-7, individual earnings are introduced and discussed. But then on the bottom of p. 7, the article says “for this analysis, we switch our focus from families to individuals”. But was it not individual incomes that were being discussed just before? That threw me for a loop, going back to see what I missed, without success. Just an oversight or clumsy phrasing perhaps, but it created much confusion in this layperson’s understanding…

    The captions for the figures are also not clear for figure 1 and 4 (“wages” and “pay” in other tables makes it clear it is individual).

    Although the text clarifies this, charts are often reproduced “as is” in popular discussions, such as newspapers or magazines or blogs, without any accompanying explanations, which I suggest makes it desirable to have clear titles or descriptions that can make them stand on their own.

    Sorry if I sound overly vehement, but this is an issue that has been driving me nuts for a long time. Most people I think aren’t careful about trying to understand the details of such arguments and so unless they are made extremely clear, may not pick them up.

    Maybe in practical terms the differences are minimal? But at a time when two doctors can each bring $300,000 ($600,000) to the family table, vs twice $36,000 ($72,000) for an average couple, compared to a single $36,000 for the average single mother or dingle guy, surely the distinction is important?

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