We should care about inequality because it has the potential to shape opportunities for the next generation. My presentation at the European Investment Bank offers a framework for thinking about this relationship, and for understanding why the adult outcomes of children are more closely tied to their family background—with the poor raising the next generation of poor adults, and the rich more likely to see their children to be rich in adulthood—in countries with greater inequality.
Differences in families, labour markets, and public policy all play a role in understanding why the United States and the United Kingdom have relatively less social mobility than many other countries.
One of the responsibilities of being President of the Canadian Economics Association is organizing the conference program; but one of the honours is giving the “Presidential Address” to the entire assembly of the next year’s conference. This year’s address is by Charles Beach of Queen’s University who spoke on “Changing income inequality: A distributional paradigm for Canada.”
This is a particularly special meeting to give the Presidential Address, as it is the association’s 50th anniversary with a record attendance of over 1,200.
Beach’s objective is to pull together a whole host of facts, and offer a framing that can drive a consistent narrative, and in this way to understand underlying drivers of inequality in Canada and guidance for policy. Beach also points out that there are significant differences between Canada and the United States.
There has been a decline in the share of income going to families in the middle over the last 30 years, and there has been a corresponding increase in the share going to the top 10%. Interestingly the share going to the bottom 20% has not changed so much, a big difference from the United States. Median family incomes have also been slightly increasing in Canada, another big difference between these two countries. The other big cross-country difference is that while top 1% shares have gone up in both countries, the rise is bigger in the United States.
It is also true that the returns to education have risen in both countries, but again more so in the United States. Several things could be driving this: immigration policy in the US is more focused on low skilled workers than in Canada where the focus is somewhat more on high skill immigrants; Canada has experienced a boom in the resource and housing sectors that disproportionately employ lower skilled workers, and unionization rates are higher; there was also a big inflow of highly educated women entering in the labour force in both countries, but more so in Canada. All these factors have had the tendency to blunt earnings growth at the top in Canada, and support it somewhat at the bottom, but perhaps done the opposite in the United States.
Typical workers have been benefiting less from overall output gains, but again the patterns differ between the two countries. Labour income as a proportion of GDP has hovered between 50 and 55% in Canada since 1960, but in the United States drifted from about that in the 1960s to below 45% by 2010.
Nicole Fortin, a professor of economics with the University of British Columbia, addressed the 50th anniversary meeting of the Canadian Economics Association with a “state of the art” presentation on earnings inequality in top incomes and the gender pay gap, examining three questions:
- What are the consequences of under representation of women in top incomes to the overall pay gap?
- How is it contributing to the slowdown in the convergence of male and female wages?
- What could be done to change things?
Some decisions invite undesirable behaviour, even if unintentional. Others can encourage desirable behaviour, but they have to be thought through. Think about taking the escalator, or taking the stairs.
These actions are challenging because they have an immediate cost, but generate long-term benefits, and because human decision-making can be skewed to a present bias. Behavioural economics studies these challenges, and was the subject of a State of the Art Lecture given by Philip Oreopoulos of the University of Toronto at the 50th meeting of the Canadian Economics Association. Here is a summary of his talk.
Branko Milanovic begins his book, Global Inequality, by posing a question: “Who has gained from globalization?” Many thoughtful Americans have the confidence to answer in a sentence. The gains have been captured by the top 1 percent. And the book ends with another question: “Will inequality disappear as globalization continues?” Many might be just as quick to answer: Of course not, the rich will get richer!
But life is not so simple. Between these two questions Branko Milanovic offers us not just a plethora of facts about income inequality that will surely make his readers think twice. More importantly, he shows us the power of bringing the facts into focus by putting a new lens over these pressing issues—a global perspective. He takes more than 200 pages to answer the first question, and only a sentence to answer the second.