Inequality: a fact, an interpretation, and a policy recommendation

Tackling inequality and poverty aren’t mutually exclusive; rather, efforts devoted to fighting the former contribute to solving the latter.

1. A Fact: Inequality has increased

There is a common storyline about income inequality that goes something like this. Inequality has not increased; even if it has, there is little that can be done about it; and even if public policy has punch, the effort directed to fighting inequality diverts attention from more pressing problems, like poverty.

There is a strand of truth to this. The inequality our society faces challenges us not to use the policies of yesteryear, but to rethink social policy for a new reality. Fortunately, we already have a set of precedents in our toolkit that can be built upon to address both inequality and poverty in a smart way.

At least one aspect of this storyline has become a caricature. We seem to have gone past the denial stage. It is pretty well accepted that income inequalities have risen significantly during the last three decades in many countries, Canada included.

The slices of the Canadian economic pie have certainly changed. The richest 10 percent has seen its share of total income rise steadily during the last two to three decades, reaching about 30 percent in recent years. Over the same period the bottom 40 percent has had the opposite experience, a steadily shrinking slice that now amounts to about 12 percent of the total income earned in the country. Four in 10 Canadians have less than half of the income to divide among themselves than the top ten percent have for themselves.

But what to make of this?

 2. Differing views: The connection between high and low incomes

One view is that high and low incomes are distinct phenomena.

The rise of the top one percent reflects a vibrant capitalist spirit of enterprise, innovation, and productivity: the hard work of inspired entrepreneurs whose higher income is merited, and ultimately benefits us all in newer and better products, lower prices, and more jobs.

On the other hand poverty is entrenched in the values, skills, and choices of the poor, and also in dysfunctional public attempts to boost their incomes, programs that just end up zapping their work incentives. Robin Hood policies that tax the rich to give to the poor ultimately don’t lower poverty, while at the same time threatening the source of prosperity.

That’s one common view, but another interpretation recognizes that high and low incomes are two sides of the same coin, reflecting important changes to the way we work, and the payoffs we receive.

Wage rates and job opportunities have increased in occupations requiring judgement, management, and teamwork; they’ve decreased in occupations that are routine. This has pushed up wages for some, and flattened them for others. A future of higher wage inequality is here. It implies both unprecedented opportunities and substantial risks, and this is not going away.

It is commonplace to think about the fate of the ‘traditional’ assembly line worker in a manufacturing plant who has been replaced by a robot designed and made by highly educated engineers. But the economic dynamics are broader than the replacement of workers holding high-school diplomas with those holding university degrees. Mesh another dichotomy on top of this physical versus cognitive division of tasks, one associated with routine versus judgement. Middle managers and X-ray technicians are as much at risk as old-school assembly line workers.

The underlying driver of all this is the computer revolution, a revolution that has been hyper-charged by freer trade. The Yale University economist William Nordhaus describes the astounding fall in the costs of performing routine calculations with computers – a 2 trillion-fold fall during the 20th century – with particularly rapid improvements made in the decade after WWII and then again between 1985 and 1995. He says: “Given the enormous decrease in computational cost relative to labor cost, it can hardly be surprising that businesses are computerizing operations on a vast scale.” If you perform a routine task, you are competing head on with the mother of all revolutions.

It’s workers doing routine jobs who face bigger risks of losing their jobs, getting paid a lower wage rate, and on this basis different incentives and opportunities to participate in the labour market, get more education, establish a long-term relationship with a partner.

Low wages for low skilled workers stuck in dead-end service jobs raise the chances many Canadians will disengage, particularly the young, and young men even more so.

But what to do about this?

3. Policies to turn to: How to make work pay

There is no one answer, and not all options involve governments tinkering with tax rates. But some do. One important step is to make work pay.

There is a grain of truth to the traditional storyline: a new economy requires a new way of supporting incomes. It is not simply unemployment insurance that Canadians need, but wage insurance; it is not simply a guaranteed income that Canadians need, but a participation income.

And we have precedents for delivering income support in these ways. The Working Income Tax Benefit is a good example. It can be thought of as a “social wage” that encourages a participation society by topping up wage rates, and offering a guaranteed income conditional on working. But in its current configuration is much too small to have significant bite for anything other than a small part of the population.

Benefits from the program begin to kick in once someone makes more than $3,000, then amount to 25 cents for every extra dollar earned, then top out at just under $1,000 for singles and about $1,800 for families. Benefits fall by 15 cents for every dollar a family earns beyond about $15,650, disappearing altogether at earnings of about $28,700.

Some parts of our Employment Insurance program also have a design of this sort, allowing Canadians to work while still collecting a fraction of their benefits.

This is smart income transfer policy for a jobs market that is more and more polarized, and it is not hard to imagine that an expansion of the Working Income Tax Benefit that folds into a restructured Employment Insurance program could become a social wage, offering Canadians both the kind of income support and wage insurance they need to stay engaged with a more polarized jobs market.

In other words with a more nuanced interpretation of the facts it is not hard to give credence to another storyline about income inequality that goes something like this. Inequality has increased; there is something that can be done about it; and if public policy has punch, the effort directed to fighting inequality contributes to solving other pressing problems, like poverty.

[ This post also appears in an abridged version as an article with the same title on the OpenCanada.org website ]