Canadian Counter-currents? Inequality and Poverty

Incomes in Canada became more unequal from the 1980’s to the late 2000’s, more or less at the same pace as other OECD countries; behind, but on the same track as the USA.

A December 2013 report by the Canadian Parliamentary Committee on Finance (see link below) does a nice job of presenting current knowledge of income trends and potential causes and consequences of growing inequality. A variety of academics, think tanks and advocacy groups presented their perspectives, which seemed to converge toward the following observations:

– as in other countries, inequality has been increasing, and at a sharper rate than people might think

– in the roughly 5 million Canadian families in the bottom 20% (the lowest income quintile), the median amount of net assets seems to be about $1000 to $1500

– while the top 5 million families average about $800,000

– the academics who spoke to the committee point out that the assets of the top 1%, 0.1% and 0.01% are astronomically higher

As the following table from the Committee report illustrates, the bottom three income quintiles – about 60% of Canadian households – saw their market incomes substantially reduced between 1976 and 2010.

Table 1 — Level and Change in Average Market Income
and Average Disposable Income, All Family Units, Canada, 1976 and 2010 (2010 constant dollars)

Quintile

Market Income

Disposable Income
(after government taxes and transfers)

Level ($)

Change

Level ($)

Change

1976

2010

$

%

1976

2010

$

%

Lowest

4,000

3,100

-900

-22.5

12,600

14,600

2,000

15.9

Second

27,000

22,500

-4,500

-16.7

30,000

32,700

2,700

9.0

Third

49,700

46,300

-3,400

-6.8

46,600

49,700

3,100

6.7

Fourth

72,800

78,500

5,700

7.8

64,300

73,500

9,200

14.3

Highest

129,400

166,800

37,400

28.9

106,600

135,500

28,900

27.1

Notes: “Market income” includes employment earnings, net investment income, retirement income and other forms of income. “After-tax-and-transfer income” – or disposable income – adds government transfers (e.g., government payments for income maintenance and social assistance) to, and subtracts federal and provincial income taxes from, market income.

To its credit, the Canadian tax and transfer system absorbed the market income losses for the bottom 60% and even left them somewhat better off in disposable (after taxes and transfers) incomes. However it is clear that the higher you were on the income scale, the better off you became, both in market and disposable income. A cursory glance would also suggest that the market incomes of the rich appear to be reduced by less than 20% by taxes.

The report points out that practically all OECD countries experienced increased income inequality between the 1980’s and late 2000’s. Even the Scandinavian countries experienced large increases, albeit from a much less unequal starting point. The causes are generally attributed to global economic changes, especially technological change.

The committee found two streams of good news in the statistics. The first is that although work and investing does not seem to be paying off for much of the population, there is a good chance that some people will be able to move into the higher earnings categories if they are smart, and lucky, and apply themselves. Intergenerational earnings mobility is significantly higher in Canada than in the USA, the other anglo countries, and even Germany and France. The report quotes Professor Myles Corak of the University of Ottawa, explaining that the Canadian tax/transfer system favours child development and social mobility through tax benefits, broadly equal support for public schooling in most communities, child care options such as parental leave, and universal medicare.

The second bit of good news is that poverty rates seem to be approaching all-time lows. The evidence is a bit soft here because of different measures being used. Two measures – one measuring a market basket of goods (MBM), the other defining an income level at which food, clothing and shelter take up just under two thirds of income (Low Income Cut-Off (LICO)) – show poverty trending downward since at least the late 1990’s.

Table 2 — Percentage of the Population Aged 18 to 64 Years in Low Income, by Measure of Low Income, Canada, various years (%)

Measure of Low Income

Low Income Rate

1976

1986

1996

2000

2010

Low income cut-off, after tax

10.5

11.2

15.0

12.9

10.1

Low income measure, after tax

10.0

10.4

12.4

12.7

12.7

Market basket measure

n/a

n/a

n/a

12.6

11.1

Notes: “n/a” means not available.

Reference for material reproduced or quoted in this article: http://www.parl.gc.ca/HousePublications/Publication.aspx?DocId=6380060&Language=E&Mode=1&Parl=41&Ses=2&File=9

A third measure, the Low Income Measure (LIM), is quite similar to the standard measure used for international comparative research. It measures the percentage of the population living on less than half of the median income for a family of similar size – so it is strictly a relative measure. The LIM tells a different story, showing that poverty levels increased in the 1990’s, and since then have remained fairly stable.

There is perhaps some explanation for the poverty increase in the 1990’s, as the federal government of the time, during the latter stages of a prolonged recession, decided to radically slash funding for provincial social assistance programs and federal unemployment benefits, and to appropriate a surplus in the Employment Insurance account, to reduce its operating deficit. Social programs expert John Stapleton (www.openpolicyontario.com) pointed out to Politudes that the 1990’s recession was especially brutal in Ontario, when social assistance caseloads were closing on 14% of the population. A “normal” average in better economic times is about 5-6%.

The reported reduction in (at least absolute) poverty is tougher to explain, and more research on that phenomenon would be useful. John Stapleton and Myles Corak both pointed out to Politudes that the LICO is based on a formula which has not been updated for two decades and therefore it may be missing important shifts in consumption patterns of the population.

Nonetheless, the tax/transfer system has provided a base of support for those on low income, and as Stapleton points out, lone parents, mostly women, have been helped in reducing their dependence on social assistance, and in improving their situation for themselves and their children – a not-so-well-known success story of Canadian social policy. But he also points out that unattached working-age adults, especially men, are losing ground in the new economy if they don’t have the needed skills and education. They are becoming the new face of social assistance, despite the fact that social assistance benefits are far below minimum wage incomes. For more of John Stapleton’s analysis , see http://www.mowateitaskforce.ca/sites/default/files/Stapleton.pdf.

The parliamentary committee, dominated by the incumbent government, concludes with several “keep up the good work” recommendations. (Opposition members appended their own recommendations to the report.)

If there is an area of consensus in the recommendations, it seems to be that present and future workers need access to education and training, and (perhaps in lieu of substantially increasing minimum wages) they recommend that the federal government increase the value of the Working Income Tax Benefit (WITB). (Politudes: Is it coincidence that the acronym rhymes with the finance minister’s riding of Whitby Ontario?) The WITB currently provides very modest supplements to the incomes of the working poor.


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