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Understanding inequality and why it is important

February 12, 2013

My presentation to the All Party Anti-Poverty Caucus of the Canadian House of Commons addressed three questions: (1) has inequality increased in Canada; (2) what explains the changes; and (3) why is it important for public policy?

I pointed out to the members of the Caucus that:

  1. Inequality has been rising in Canada since the early 1980s, driven by stagnant and declining incomes in the middle and lower half during the 1980s and 1990s, and rising top shares throughout the last 30 years.
  2. The tax-transfer system plays an important role in reducing inequality, but has not kept pace after about the mid 1990s.
  3. Rising inequality is a global phenomenon. The change in Canada has been above average when compared to other rich countries, and particularly notable for the increase in top shares.

I also suggested that while we might be interested in these changes because of a sense of fairness or because of concerns over economic efficiency, we should also be interested because inequality shapes opportunity, and that this may be a reason why all parliamentarians—regardless of their political allegiances—should treat it as an important issue for public policy.

You can download the English version here: Understanding_inequality_and_why_it_is_important_a_presentation_to_the_All_Party_Caucus

And the French version here: Understanding_inequality_and_why_it_is_important_a_presentation_to_the_All_Party_Caucus_en_francais

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9 Comments
  1. carsjam permalink

    I like your reference to rents being an efficiency concern. A very nice deck. I hope they paid attention.

    • Thanks. I was trying to say that to the degree that inequality arises from rents, then the disincentive effects of taxation are not that strong at all.

  2. carsjam permalink

    Warming up for the State of the Union, watching Eisenhower’s farewell address. Besides the “military industrial complex” line, this stood out:
    “Another factor in maintaining balance involves the element of time. As we peer into society’s future, we — you and I, and our government — must avoid the impulse to live only for today, plundering for our own ease and convenience the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow. “

  3. Hi Miles, I have a question about the slide on labour markets and institutions. It says that it’s harder to stay in the middle class and that average incomes have declined in the bottom of the distribution because of 1. globalization and skill-biased technological change; 2. erosion of labour-market institutions, and 3. “The gender wage gap has been reduced and this is a force reducing inequality”. Does this sentence mean that the gender wage gap was a force reducing inequality, and this gap has declined? Or is is the opposite – that reducing the gender wage gap means less inequality overall? Can you say something more about this?

    • Hi Andrew. Yes, this is what I was trying to say. That the reductions in the gender wage gap that we have witnessed have been, in contrast to the other factors, a force for lowering inequality. I take this finding from a research paper summarized in this post.

  4. Ron Wray permalink

    Excellent presentation as always Miles.

    It helps remind us that while all the headlines are about taxes, the wage issue is perhaps the most troublesome for our future. Taxes and redistribution through various forms of transfer and social protection certainly can moderate the gap yet it was earned wages that created a healthy middle class. While we certainly have a tax problem that contributes to income inequality, in my eyes it is a secondary driver to economic wages and employment opportunity.

    It has been 30 years since the Royal Commission on the Economic Union and Development Prospects for Canada (led by Donald Macdonald) and it is time for another one. Ultimately, Macdonald recommended an “industrial policy” of ‘free trade’ – market forces rather than a policy of planning. As we watch firms such as Caterpillar exit the Canadian industrial landscape and the car industry shrink, now is the time for a full-blooded and open evaluation of free trade (FTA and NAFTA) and review of future options. I have never seen a strong balanced and ideologically independent analysis of these agreements. And lets not forget what is happening in our agricultural sector (Wheat Board, future of supply management) and how our commodity sector has been ‘hollowed out’ by global corporations.

    Yes, I hold out little hope under this government – or even a Liberal government – and if they did it would likely be ‘stacked’. Indeed, I sometimes fear even the NDP has abandoned the middle and working class to the ‘false nature’ of market forces and globalization.

    Sad thoughts on Family Day.

  5. Nice work. But I think you missed the biggest issue with rising income inequality. We produce about 2% more per year because of productivity gains – but someone must consume that extra 2%. The only sustainable way that can happen is if consumers (aka middle class) incomes increase with productivity.

    For the last 30+ years, incomes have not kept up with productivity, but households have been borrowing to make up the difference. In the US, the borrowing stopped in 2007 – and the result has been a persistently weak economy. In Canada, debt levels are still increasing but I expect this to stop soon. When it does, I expect a long period of Canadian economic weakness.

    • Thanks Michael for making this point, and asserting that more unequal economies may be more unstable in a macroeconomic sense. My sense is that Joe Stiglitz makes this point as well in his book The Price of Inequality. That is certainly a reason to also care about inequality.

      • Yes, more unstable. Ashwin Parameswaran and Josh Mason in particular make that point very well.

        But also: less prosperous, because lower velocity of money if more income/wealth is received/held at the top. The market monetarists will argue that the Fed reaction function means that makes no difference, but…

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