The political shakeups in the UK and in the US should be a wakeup call for Canada: we can’t remain complacent on income inequality.
As the disbelief about Brexit turns into taking stock, many observers are pondering the potential repercussions for exchange rates, trade, labour mobility and immigration. Political analysts have begun to connect the dots among populist, anti-globalization movements in several developed economies, movements that have given rise to the likes of Donald Trump, Nigel Farage and Marine LePen and their chauvinistic rhetoric. So far, Canada seems to be standing apart from this trend. Why? And what does it mean for the path we should take?
There are several possible reasons for Canada being somewhat removed from the fray. Our geography means we have not had to face the waves of refugees and illegal immigrants rushing to our shores, which seem to be partly behind the xenophobia in parts of Europe and the US. But it may also be because of important differences in the level of income inequality and recent inequality trends in Canada, relative to those in other developed economies. Over the past several decades, the US and the UK — the countries now facing the strongest popular discontent — have experienced much greater inequality than has Canada, and they may have reached a tipping point in terms of political stability. And while many other countries have experienced steady increases in inequality and the loss of middle-class jobs in recent decades, Canada’s inequality path has been more nuanced.
In a recent book, the IRPP — in collaboration with a network of Canadian labour economists (the CLSRN) — brought together leading experts to provide a detailed examination of the patterns, causes and consequences of inequality over the past 35 years in Canada. As Keith Banting and John Myles point out in their analysis, pundits have taken opposing views on the state of inequality in Canada, employing different time frames and metrics. Based on measures like the Gini coefficient, market income inequality increased substantially in Canada from 1980 into the 1990s, and it has remained well above pre-1980 levels ever since. By that measure, Canada is a much more unequal society now than it was in the past. Similarly, the share of total income going to the top 1 percent of earners has risen from about 8 percent in 1980 to about 12 percent today.
But these trends have more or less stabilized since 2000. The Gini coefficient has been flat, and in recent years even the share of income going to the top 1 percent, which peaked at 14 percent in 2007, has fallen back to its early 2000s level. Much like other countries, Canada had been experiencing a gradual hollowing out of middle-class jobs over several decades, but this trend also subsided after about 2000. This in part could explain the present lack of traction for an extreme populist movement in Canada.
Indeed, much of the discussion about the rise of Donald Trump and the Brexit vote has focused on the disaffected people who have lost out in the transition to a more globalized economy, in terms of both employment and income. In the US, well-paying, middle-class jobs have become harder to come by, while the top 1 percent’s share of income has soared to levels not seen since the 1920s (it is now over 19 percent). This has fuelled a generalized feeling that the game is rigged. Some people might be benefitting from globalization, but many others believe they are not getting a share of the prosperity. In Canada, inequality trends have stabilized since 2000, so there may be fewer people feeling the system is working against them.
In Canada, inequality trends have stabilized since 2000, so there may be fewer people feeling the system is working against them.
In order to find out if this is true and what we can expect as we move forward, we need to understand the dynamics underlying Canada’s inequality trends. One possible explanation for Canada’s distinct path is our redistributive policies — particularly relative to those of the US. For instance in Canada, through the 1980s and up to the mid-1990s, a combination of increased taxes and transfers offset rising market-income inequality (before taxes and transfers), such that the level of inequality in disposable income (after taxes and transfers) remained more or less unchanged. Much of this policy work was done at the provincial level. But beginning in the mid-1990s, cuts in social assistance and employment insurance for those at the bottom end of the income distribution, as well as tax cuts at the top, ended up contributing to rising income inequality overall. Therefore when income inequality flatlined after 2000, it was not because of, but in spite of changes in redistributive policies.
Of course, other government measures, such as minimum wages, unionization and education, could have helped moderate changes in earnings disparities. Nicole Fortin and Thomas Lemieux find that increases in minimum wages in the 2000s did reduce inequality in wages at the low end of the distribution, but it is not clear these gains were large enough to have a substantial impact on family-income inequality overall. As for labour laws and regulations, there was a lack of progress and perhaps further deterioration in workers’ bargaining power over this period. Moreover, as Kelly Foley and David Green argue, education policies — often touted as the preferred route to reducing inequality — were implemented in a way that, if anything, reinforced cross-generational and possibly within-generation inequality. Thus, it seems that these broad sets of policies, also, do not hold the key to understanding the flat inequality trend since 2000.
As is often the case in Canada, regional differences provide important insights into this question. While Canada overall experienced relatively little job loss in the middle of the earnings distribution after 2000, this was because strong employment gains in low- and middle-paying occupations in the resource-rich provinces (Alberta, Saskatchewan, and Newfoundland) managed to offset manufacturing jobs losses in Ontario and Quebec. Indeed, several of our contributors find that the resource boom played a significant role in halting the upward trend in inequality. That safety valve meant that in Canada workers in many sectors were under much less stress from globalization and technological change than were their counterparts in other countries.
To the extent this is true, there are now reasons to be concerned about Canada’s prospects on this front. The resource boom has come to an abrupt end, and it does not appear likely that oil prices will return to their former levels any time soon and generate large numbers of well-paid jobs. And even if they do, we cannot go back to our previous production levels or even to the same type of oil and gas extraction if we are to meet our climate change obligations. Without this safety valve, income inequality could very well resume its upward course.
Canada has lost its safety valve — the resource boom — and inequality trends could very well resume their upward course.
What does this mean for our path forward? First, it means that we have avoided the worst excesses of income inequality (by international standards), but more out of luck than virtue. The redistributive capacity of our tax-and-transfer system was weakened in the mid-1990s, but the impact of that weakening was masked by the resource boom of the 2000s. As for the effectiveness of other policy tools, several of our contributors conclude that incremental changes in existing policies would have little impact on inequality. Scott Legree, Tammy Schirle, and Mikal Skuterud find that even if all the provinces adopted the most union-friendly regulations prevailing in the country, the unionization rate would increase by 6 percent but the impact on inequality would be modest at best. This is because many of the beneficiaries of unionization in its current form are relatively well-paid public sector workers, rather than low-wage workers in the private sector. Similarly, increases in the minimum wage in the order of what we have seen in the past (real increases of about 10 percent) would have little effect on the overall income distribution. Finally, given that higher education is disproportionately accessed by upper-middle- and higher-income families, policies such as enhancing RESPs and marginally lowering tuition fees would by-and-large not benefit children from lower-income families.
All of this leads us to the conclusion that if Canada is to avoid the mounting social tensions happening in other developed economies, it needs to radically rethink the way benefits of economic growth are distributed. Since income inequality is the inherent product of mechanisms operating throughout the economy, a comprehensive and substantial policy strategy is called for.
If Canada is to avoid what has been happening in other developed economies, it needs to radically rethink the way benefits of economic growth are distributed.
As first steps toward expanding the share of the economic pie going to workers, the minimum wage should be gradually increased to $15 and the Working Income Tax Benefit (WITB) significantly expanded. Of course, that economic share would be more secure if workers’ bargaining rights were strengthened. As less than 20 percent of the private sector is unionized, traditional unionization laws have failed to provide the workforce with a voice in their working conditions and sufficient bargaining power to share in economic growth. Moving beyond the traditional approach by granting stronger rights to all workers — union and non-union — holds more promise. As well, the inordinate rise in the share of income held by the 1 percent in recent decades suggests that the bargaining power of top earners should be reduced, particularly through measures related to CEO pay and better corporate governance.
Taking a longer view, several studies have linked early childhood education and family income when the children are young to improved human capital, employment and earnings outcomes at older ages. We believe that initiatives in these areas should be combined with a more radical approach to alter risk-averse attitudes toward education among low-income families by, for example, providing free tuition and some subsidies for higher education for their children. While many of the direct policy levers in all these areas are in the provincial domain, the combination of strained provincial budgets and the need for a national response call for active federal government leadership on inequality. Fortunately, recent discussions and actions on the Canada Child Benefit and WITB suggest the federal government is willing to take a leadership role.
In our view, the Brexit result and the rise of populist movements in many developed countries should be a wakeup call for Canada. Globalization and technical change have not benefited everyone, and the need to achieve a more equitable distribution of the benefits of economic growth is as evident as it is pressing. Canadians might think from their recent history that these issues don’t really concern us. But we have done well since the early 2000s principally because of the resource boom, rather than because our policy response was better. Now that the resource boom has turned into a bust, it is conceivable that Canada will rejoin the rising inequality path of other developed countries. We can either prepare for that future by finding a more equitable way to share our prosperity, or risk facing our own versions of Donald Trump and Brexit.
Income Inequality: The Canadian Story, eds David A. Green, W.Craig Riddell and France St-Hilaire, is available at irpp.org.
Photo: Sergei Bachlakov / Shutterstock.com
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