- The top-ranking provinces, New Brunswick and P.E.I., score “A” grades and rank 8th and 9th among the 26 comparator jurisdictions.
- B.C. and Ontario get “C”s and rank ahead of only two peer countries, Australia and the United States.
- Overall, Canada ranks 13th out of 16 peer countries and gets a “B” on income inequality.
Putting income inequality in context
Growing income inequality was called the “defining challenge of our time” in 2013 by then-U.S. President Barack Obama.1 The unexpected results of two major electoral events of 2016, the U.K. vote to leave the European Union (a.k.a. Brexit) and the election of Donald Trump as U.S. president, highlight the social unrest underpinned by growing inequality. According to the World Economic Forum’s 2017 Global Risks report, “rising income and wealth disparity” were identified by survey respondents as the trend most likely to determine global developments over the next 10 years, while a related trend, “increasing polarization of societies,” was deemed the third most important after climate change.2
Income inequality is the extent to which income is distributed unevenly in a country or region. It is an important indicator of equity in an economy and has implications for other social outcomes such as crime and life satisfaction. Income inequality is also closely linked to intergenerational income mobility, which is the extent to which income levels are able to change across generations. As noted by the OECD, “the more unequal a society is, the more difficult it is to move up the social ladder, simply because children have a greater gap to make up.”3
Although Canada and its peer countries are among the wealthiest in the world, the income per capita figure does not tell us how this income is distributed. Income inequality within a country is often masked by the national average. The gap between the rich and the poor has widened over the past several decades, and the concentration of income among the super-rich is happening in many countries, including Canada.
Large income gaps can diminish economic growth if these gaps mean the country or region is not fully using the skills and capabilities of all its citizens or if these gaps undermine social cohesion, leading to increased social tension and political and economic instability.
How is the income inequality calculated?
The most commonly used measure of income inequality is the Gini coefficient, which is measured on a scale of 0 to 1. The Gini coefficient calculates the extent to which the distribution of income among individuals within a country deviates from an exactly equal distribution:
- a Gini coefficient of 0 represents exact equality—that is, every person in the society has the same amount of income
- a Gini coefficient of 1 represents total inequality—that is, one person has all the income and the rest of the society has none
How do the provinces fare relative to Canada’s peer countries when it comes to income inequality?
New Brunswick (Gini coefficient of 0.285) and P.E.I (0.287) have the lowest income inequality among the provinces, ranking 8th and 9th respectively among the 26 comparator regions and scoring “A” grades. The Nordic countries Denmark (0.254), Finland (0.257), and Norway (0.257) have the lowest income inequality among all the comparator regions, with Gini coefficients below 0.26.
Quebec ranks just behind P.E.I. (0.290) in 10th place and gets a “B” grade. Five other provinces are “B” performers and do better than the national average: Manitoba (0.298), Nova Scotia (0.303), Newfoundland and Labrador (0.306), Saskatchewan (0.308), and Alberta (0.320).
Overall, Canada (0.322) gets a “B” and ranks 13th among the 16 peer countries.
The provinces that rank the lowest on the income inequality report card are B.C. (0.323) and Ontario (0.331). Both provinces get “C” grades and place ahead only of worst-ranked peer countries Australia (0.337) and the United States (0.391).
How do the provinces perform relative to one another?
New Brunswick, P.E.I., and Quebec have the lowest income inequality among the provinces. Alberta’s is close to the national average of 0.322, while most provinces do better, with Gini coefficients ranging from 0.29 to 0.31. Ontario and B.C. are the provinces with the highest income inequality.
Are there comparable income inequality data for the territories?
No. Unfortunately, Statistic Canada’s Canadian Income Survey, the data source for OECD’s income inequality calculations for Canada, does not include the territories. So, we are unable to gauge the performance of the territories relative to the peer countries on this indicator.
The Conference Board plans to publish a standalone How Canada Performs report on social performance in the territories, examining key social measures, in spring/summer 2017.
How has income inequality Canada and the provinces changed over time?
It is not possible to examine the historical performance for the indicator benchmarked in this report card because the OECD began collecting and disseminating income inequality data at the regional level only recently. However, we are able to look at historical Gini coefficient figures for Canada and the provinces using Statistics Canada data. Note that the Statistics Canada data are not comparable to the OECD data benchmarked in this report card, so the Gini coefficient figures are slightly different. The OECD uses differing income concepts and components in arriving at its income inequality figures.4
Looking at Statistics Canada’s figures, we see that Canada’s income inequality has risen since the late 1970s, but the increasing trend has diminished since the turn of the century, with the Gini coefficient remaining between 0.311 and 0.318 (with the exception of a slight peak of 0.322 in 2004).5
Income inequality has risen in a number of the provinces since the late 1970s, with notable increases in B.C. and Ontario.
Are there drawbacks to using the Gini coefficient as a measure of income inequality?
The Gini coefficient is a useful measure because it summarizes income inequality in one easy-to-compute number, allows for comparisons of countries and of regions, and lets us track changes over time. However, it’s not an ideal measure of income inequality.
First, on its own, it gives us no indication of standard of living and poverty. Two countries or regions with very different incomes per capita can have identical or similar Gini coefficients, since the Gini is based on relative not absolute measures of income. For example, according to World Bank data, the United States and Uganda have almost identical Gini coefficients;6 however, poverty levels in the U.S. are much lower, and its income per capita is 80 times higher than that of the Uganda.7
Second, it is possible for two countries or regions with very different income distributions to have identical Gini coefficients. The Gini is calculated using the Lorenz curve, which graphically depicts the distribution of income—it is a plot of the cumulative share of people from lowest to highest incomes (x-axis) against the cumulative share of income earned (y-axis). For example, the point (0.4, 0.2) on a Lorenz curve would mean that the lowest-income 40 per cent of the population earns 20 per cent of the total income. The line y = x represents a perfectly equal distribution of income. In other words, the lowest-income 10 per cent of the population earns 10 per cent of the total income, the lowest 20 per cent earns 20 per cent of total income, etc. The Gini measures how far the Lorenz curve for a given country or region is from this line of equality (y = x). Since it is possible for Lorenz curves for different regions to intersect, regions with different income distributions (and, hence, different Lorenz curves) can have the same Gini coefficients.
Third, the Gini coefficient is more sensitive to inequalities in the middle part of the income spectrum than it is to extremes. So, it does not give adequate information on what is happening for those with the lowest and highest incomes and on the distribution of income among the very rich relative to the poor. For example, while the Gini coefficient for Canada has not increased materially since 2000, the share of income going to the top 1 per cent of income earners grew between 2000 and 2007, from 11.2 per cent to 12 per cent.8
What is another way to measure income inequality?
Another way of tracking income inequality is to divide the population into 10 groups (deciles) from poorest (bottom decile) to richest (top decile) and then calculate the share of income that accrues to each group. If each of the 10 income groups has the same share of total national income—that is, 10 per cent—the distribution could be described as equal.
The OECD has data on the ratio of income held by the top decile (top 10 per cent) relative to the share of income held by the bottom decile for Canada and its peer countries. Unfortunately, the OECD does not have comparable data at the regional level, so we can’t compare the provinces and the peer countries.
Looking at peer country data on income decile ratios, we see that the income inequality story doesn’t change much. Denmark, Finland, Belgium, and Norway remain the countries with the lowest income inequality, while the U.S. has the highest inequality. In the U.S., the income received by the top decile is almost 19 times higher than the income received by the bottom decile.9 Japan drops from 10th among the 16 peer countries to having the third worst income inequality, while the U.K. drops a notch from 14th to 15th spot.
Canada fares slightly better, ranking 12th (up from 13th using the Gini measure); the income received by the top decile in Canada is 9 times higher than the income received by the bottom decile.
Statistics Canada data reveal that among the provinces, Alberta and B.C. have the highest income inequality, as measured by the share of income going to the top decile relative to the share going to the bottom decile. In both provinces, the share of income going to the top decile is 10 times higher than the share going to the bottom decile. P.E.I. and New Brunswick have the lowest income inequality according to this measure.10
Overall, the share of income going to the top decile in Canada increased notably from the late 1980s to the early 2000s, while the share going to the bottom decile decreased.11 But the share of the top 10 per cent has been trending modestly lower since 2000.
How much of an impact do taxes and transfers have on income inequality?
Personal income taxes and government transfers (such as social assistance, unemployment insurance, old age security, and child benefits) play an important role in reducing income inequality.
Before taxes and transfers, the peer country with the highest income inequality is Ireland, with a Gini coefficient of 0.574, followed by the U.K. and the United States. Canada has the fourth lowest income inequality before taxes and transfers, while Norway, the Netherlands, and Switzerland have the lowest Gini coefficients.
After income is adjusted by taxes and transfers, income inequality decreases significantly for some countries. The chart ranks the countries from left to right based on the size of the decline in inequality due to the tax and transfer system. Of the 16 peer countries, the tax and transfer system affects inequality in Finland the most. The Gini coefficient falls from 0.495 before taxes and transfers to 0.257 after taxes and transfers—a 48 per cent drop.
At the opposite end, the U.S. tax and transfer system has the smallest effect on income inequality of the 16 peer countries. The U.S. Gini coefficient falls from 0.509 to 0.391—a 23 per cent decrease. Ireland, whose inequality before taxes and transfers is the highest among all peers (with a Gini coefficient of 0.574), performs much better than the U.S. after taxes and transfers—Ireland’s Gini coefficient falls to 0.309, a 46 per cent drop.
Relative to its peers, Canada’s tax and transfer system reduces inequality by 27 per cent—the Canadian Gini coefficient falls from 0.440 to 0.322. This is the second lowest reduction in inequality after the United States.
With respect to the provinces, Newfoundland and Labrador has the highest income inequality before taxes and transfers, followed by Ontario and Quebec. The Prairie provinces, Alberta, Manitoba, and Saskatchewan, have the lowest income inequality before taxes and transfers.
The tax and transfer system affects Quebec the most and Alberta the least. Quebec’s Gini coefficient falls from 0.445 to 0.290 after taxes and transfers—a 35 per cent drop. Alberta’s Gini coefficient decreases by 20 per cent (from 0.4 to 0.32)—an even smaller percentage drop in inequality after taxes and transfers than in the United States.
Canada’s tax and transfer system is not reducing income inequality as much as it once did, however. In the 1980s and early 1990s, taxes and transfers reduced the Gini coefficient to a greater extent than in recent years.12
The weakening retributive effect of transfers and taxes is more obvious if we look at data on how the share of income decile ratios has changed. In the mid-1990s, taxes and transfers reduced the difference in the ratio of the share of income going to the top decile in Canada relative to the share going to the bottom decile by 35 per cent. In 2014, taxes and transfers reduced this ratio by only 8 per cent.13
However, changes introduced in the 2016 federal budget—the new high-income tax bracket and the reduction of the tax rate for those in the middle-income bracket—will likely increase the redistribution of income. Taxable income of $200,000 or more is now taxed at a rate of 33 per cent (up from 29 per cent), while the federal tax rate on earnings between $45,000 and $90,000 has dropped from 22 per cent to 20.5 per cent.14
What about wealth inequality?
While much of the focus in the media is on income inequality, the widening wealth gap in Canada also deserves attention. In many countries, wealth inequality is more pronounced than income inequality. As opposed to income, which is annual “flow,” wealth is a “stock” concept—it is a measure of total assets at a given period in time. Net wealth, or assets minus liabilities, is the measure used when assessing wealth inequality.
In Canada, the average wealth of families in the top quintile (the 20 per cent of family units with the highest incomes) grew by a whopping 80 per cent between 1999 and 2012. Conversely, those in the lowest income quintile saw their wealth increase by just 38 per cent. Furthermore, the top quintile held 47 per cent of overall wealth in 2012, up 2 percentage points from 1999, while the bottom quintile’s share of overall wealth dropped a percentage point, down to 4 per cent.15
More of the gains in wealth for the top quintile were a result of gains from non-housing assets. Gains for all the other quintiles were a primarily due to gains in real estate assets.