Canadian Income Inequality
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Is Canada becoming more unequal?
- Income inequality in Canada has increased over the past 20 years.
- The richest group of Canadians increased its share of total national income between 1993 and 2008, while the poorest group lost share. Middle-income Canadians also lost share.
- Although the gap between the rich and poor widened, Canadians in the poorest income group still saw their income levels rise, albeit minimally.
What is income inequality and why does it matter?
Income inequality is the extent to which income is distributed unevenly in a country. It’s an important companion statistic to income per capita, which measures how much income a country has, but not how this income is distributed. Income inequality within a country is often masked by the national average.
High inequality raises two questions. First, what is the impact on the economic well-being of a country? The answer is that high inequality can diminish economic growth if it means that the country is not fully using the skills and capabilities of all its citizens or if it undermines social cohesion, leading to increased social tensions. Second, high inequality raises a moral question about fairness and social justice.
There is, however, no consensus on when income inequality reaches this tipping point.
Is Canada becoming more unequal?
Income inequality in Canada has increased over the past 20 years.
The most commonly used measure of income inequality is the Gini index, which is measured on a scale of 0 to 1. Named after the Italian statistician Corrado Gini, the Gini index calculates the extent to which the distribution of income among individuals within a country deviates from an exactly equal distribution:
- a Gini index of 0 represents exact equality—that is, every person in the society has the same amount of income
- a Gini index of 1 represents total inequality—that is, one person has all the income and the rest of the society has none
Canada reduced inequality in the 1980s, with the Gini index reaching a low of 0.281 in 1989.1 Income inequality rose in the 1990s, but has remained around 0.32 in the 2000s.
Canada is not alone in experiencing an increase in income inequality. Global inequality is rising and most of Canada’s peer countries have also experienced rising inequality. But rising inequality among developed countries is not inevitable. Other countries with similar levels of income per capita have lower income inequality. For example, income per capita in Austria and Denmark is nearly equivalent to Canada’s, yet these two countries have lower income inequality as measured by the Gini index—particularly Denmark.
But isn’t the average Canadian better off today?
Yes, the average Canadian is better off than she or he was a generation ago. In 1976, average income was $51,100; by 2009, it was $59,700—an increase of 17 per cent over 33 years. These figures are in real dollars—which means converting the 1976 income figure into 2009 dollars by adjusting for inflation.
But average income is not necessarily a good measure of how the majority of people are doing. Some analysts suggest using median income instead. Median income is the amount that divides the income distribution into two equal groups—half having income above that amount, and half having income below that amount. The average income can be distorted by the highest and lowest values. The median—the middle value of the group—is not affected by the actual level of the highest or lowest values.
Median income increased from $45,800 in 1976 to $48,300 in 2009. This increase has been very modest—just 5.5 per cent over 33 years. Moreover, the gap between average and median income has been growing, which is not good news. The growing gap signals that income growth is distributed unequally.
Paul Krugman, winner of the 2008 Nobel Prize in Economics, gives a simple but effective example of the difference between average and median income.2 Suppose there are 10 people in a bar and they each earn between $34,000 and $36,000. The average income in that room is around $35,000. The median income is in the $35,000 range as well.
Now let’s assume that Bill Gates walks into the bar and that his annual income is $1 billion. All of a sudden, the average income of the people in the bar soars to $91 million, but the 10 people who were already there before Bill Gates walked in are no richer than they were before. The median income remains around $35,000. Only one person is better off, and so inequality rises.
While this example is admittedly simplistic, the Bill Gates example has relevance to income patterns in Canada—average income has risen, but that’s due mostly to the top earners increasing their share of the economic pie at the expense of the rest.
We can see this by dividing the population into five groups (quintiles) from poorest (first quintile) to richest (fifth quintile) and calculating the share of income that accrues to each group. If each of the five income groups had the same share of total national income—that is, 20 per cent—the distribution could be described as equal.
In Canada, only the fifth quintile—the group of richest Canadians—has increased its share of national income. All other quintile groups have lost share. This was particularly evident in the 1990s, when the income share for this top group jumped from 36.5 per cent in 1990 to 39.1 per cent in 2000.
The pie chart shows that the richest income group (fifth quintile) has by far the largest share of Canada’s economic pie—with 39.2 per cent of total national income.
Why are the rich getting richer?
Most gains have gone to a very small group of “super-rich.” To understand this, we have to look in more detail at the top quintile group—the top 20 per cent of Canadians. For this we need a different data set, one that provides more information on this group of super-rich. In a study for the Canadian Centre for Policy Alternatives, researcher Armine Yalnizyan uses tax file data to track the richest 1 per cent of Canadians; that is, those whose income was higher than 99 per cent of Canadian tax filers.3 She found that this group—the 246,000 people whose average income was $405,000—took home almost a third of all growth in incomes from 1998 to 2007, a decade that saw the fastest economic growth in this generation. She notes that: “The last time the economy grew so fast was in the 1950 and ’60s, when the richest 1 per cent of Canadian took only 8 per cent of all income growth.”4
The phenomenal growth in incomes of the super-rich is not due to the assets they own. Yalnizyan points out that, while it is true that historically the super-rich relied mostly on unearned income from assets, “the income of the richest 1 per cent is due mostly to the lavish sums they are paid for the work they do.”5
This is consistent with findings in the United States. As opposed to the period prior to the 1930s, a period Paul Krugman calls the “long gilded age,” when very high incomes were due to the assets (stocks, bonds, and property) owned by the super-rich, asset ownership “is no longer the main source of elite status. These days even multimillionaires get most of their income in the form of paid compensation for their labor.”6 He continues:
Needless to say we’re not talking about wage slaves toiling for an hourly rate. If the quintessential high-income American circa 1905 was an industrial baron who owned factories, his counterpart a hundred years later is a top executive, lavishly rewarded for his labors with bonuses and stock options. Even at the very top, the highest 0.01 percent of the population—the richest one in ten thousand—almost half of income comes in the form of compensation.7
Why is this happening in Canada and many other developed countries? The causes tend to fall into two broad categories: market forces and institutional forces.
Market forces, particularly skill-biased technical change and increased globalization, are creating a rising demand for highly skilled labour. As Edward Lazear, chairman of the U.S. President’s Council of Economic Advisors, noted in a 2006 speech: “In our technologically advanced society, skill has higher value than it does in a less technologically advanced society.”8 As developed countries import more low-skills-intensive goods and export more skills-intensive goods, jobs in low-skilled industries are lost in those developed countries.
Not all researchers agree that skill-biased technical change (SBTC) and globalization are at the root of all or even most of the rising inequality. In a paper published in the Journal of Labor Economics, David Card and John DiNardo argue that “contrary to the impression conveyed by most of the recent literature, the SBTC hypothesis falls short as a unicausal explanation.”9
An alternative explanation, put forward by Krugman and others, is that the increase in inequality can be attributed to institutional forces, like declines in unionization rates, stagnating minimum wage rates, deregulation, and national policies that favour the wealthy. In Canada, Yalnizyan notes that falling top marginal tax rates are part of the explanation for the rise of the richest 1 per cent of the population.10
If the rich are getting richer, are the poor getting poorer?
Not necessarily. It is possible for the relative gap between the rich and poor to widen, even while all Canadians see their absolute income levels rise. This is precisely what has happened in Canada. The average income level of the poorest group of people in Canada—after taxes and transfers and after adjusting for inflation—rose over the time period for which we have data—but only marginally. It rose from $12,400 in 1976 to $14,500 in 2009.
The poor did get notably poorer in two periods. The recession in the early 1980s caused the income level of the poorest group to fall from $13,500 in 1981 to $12,300 in 1983. The economy bounced back quickly from that recession, however, and income levels recovered. This was not the case for the 1991–93 recession, the effects of which lingered for most of the decade. Between 1989 and 1998, real average incomes among the poorest group fell by an average of 2.2 per cent per year. This decline was due largely to recession effects on earnings, but also to the fact that average transfers from governments fell over that period.
While the poor did not get poorer according to absolute real income levels, they did get poorer in a relative sense. The gap between the real average income of the richest group (fifth quintile) of Canadians and the poorest group (first quintile) grew from $92,300 in 1976 to $117,500 in 2009. Thus, while the poor are minimally better off in an absolute sense, they are significantly worse off in a relative sense.
What about the share of people in low income? Has this increased?
The answer to this question depends on how you define a person with low income. Statistics Canada produces two relative measures: the low income measure (LIM) and the low income cut-off (LICO) measure. Human Resources and Skills Development Canada has developed an absolute measure: the market basket measure (MBM).11
Low income measure: The LIM is defined as half the median family income. A person whose income is below that level is said to be in low income. The LIM is adjusted for family size.
Low income cut-off: The LICO is the income level below which a family would devote at least 20 percentage points more of their income on food, clothing, and shelter than an average family would. People are said to be in the low-income group if their income falls below this threshold. The threshold varies by family size and community size, as well as if income is calculated before or after taxes. For example, a single individual in Toronto would be said to be living in low income if his or her 2009 after-tax income was below $18,421.
Market basket measure: The MBM is a measure of the disposable income a family would need to be able to purchase a basket of goods that includes food, clothing, shelter, transportation, and other basic needs. The dollar value of the MBM varies by family size and composition, as well as community size and location. MBM data are available since 2000 only.
The three measures produce different results. In 2009, according to each measure, the following numbers of Canadians were living in low income:
- LICO—3.2 million (9.6 per cent of the population)
- MBM—3.5 million (10.6 per cent)
- LIM—4.4 million (13.3 per cent)
The chart shows how the three measures also produce different results over time. Using the LICO measure results in a decreasing share of people in low income from 1996 to 2007, followed by a slight upturn in 2008 and 2009. The LIM measure results in a share of people in low income that has increased since 1990. The MBM, which has data starting only in 2000, shows results similar to the LICO but with a sharper upturn in 2008 and 2009.
Which measure of low income is best?
There are pros and cons to each measure.12 Absolute measures—such as the market basket measure—set the poverty threshold at some minimum income required to maintain a particular standard of living. Relative measures, such the LIM and the LICO—set the threshold in relation to some measure of “average” income of the population—usually the median income level—and define people as being in low income if their income is substantially lower than that average income. Developed nations like Canada usually use relative measures.
The main charge against relative measures is that the threshold does not reflect “real” poverty as measured by the ability to meet basic needs. Another common criticism is that a relative measure would never show poverty as being eradicated unless a country had a completely flat income distribution.
Supporters of a relative measure argue that it takes into account the critical issue of social exclusion. To participate fully in society, individuals need a level of resources that is not too far below the norm in that community. Falling markedly behind the community average means effective exclusion from the normal life of society. As John Kenneth Galbraith argued in The Affluent Society, a relative measure of poverty accounts for what the poor cannot have as the minimum necessary for decency—the poor “are degraded, for, in a literal sense, they live outside the grades or categories which the community regards as respectable.”13 A recent House of Commons report on poverty quoted Peter Townsend, the late British sociologist:
Individuals, families and groups in the population can be said to be in poverty when they lack the resources to obtain the types of diet, participate in the activities and have the living conditions and amenities which are customary, or at least widely encouraged, or approved, in the societies to which they belong. Their resources are so seriously below those commanded by the average individual or family that they are, in effect, excluded from ordinary living patterns, customs and activities.14
Evidence from the World Values Survey tends to support a relative measure. Researchers Richard Ball and Kateryna Chernova found that changes in relative income had a much larger impact on happiness than did changes in absolute income.15
Absolute measures are commonly used in developing countries to signify the minimum income needed for survival. For example, the United Nations uses the level of US$1 a day as the approximate minimum income needed for physical survival in many developing countries.
But a relative measure, LIM, is used most frequently by developed countries to compare international results. Indeed, the relative concept of poverty—as measured by LIM or LICO—is much more closely related to the Conference Board’s goal—to measure and compare the “quality of life” of Canadians—than strict requirements for food and shelter that enable a person to physically survive.
The MBM measure, however, is useful for comparing low-income rates among provinces and cities, since the threshold varies not only by family size and composition but also by community size and geographic location. Statistics Canada uses the MBM to compare provinces.
Do low-income shares vary among the provinces?
Obvious income differences exist among the provinces, as well as among cities. Using the MBM, the percentage of people living in low income in 2009 was highest in two Atlantic provinces and British Columbia. Prince Edward Island and Quebec had the lowest rates.
The earliest year for which data are available is 2000. Between 2000 and 2009, every province except Ontario reduced its low-income rate. Examining the recent recession, however, reveals that between 2007 and 2009, seven out of ten provinces experienced a rise in their share of populations living in low income. Only P.E.I., Saskatchewan, and New Brunswick enjoyed a decrease. The largest jump in the low-income rate occurred in Alberta—it went from 6.6 per cent to 9.9 per cent.
Research from the Conference Board’s Centre for the North has revealed that, of Canada’s 288 census divisions, the five with the lowest median incomes are in Canada’s North: three in Northern Manitoba, one in Northern Saskatchewan, and one in Northern British Columbia.16 However, the three census divisions with the highest median income are also in the North, because of the oil sands, diamonds, and natural gas.17
Do low-income shares vary among Canadian cities?
Of Canada’s larger cities, Vancouver had the highest share of its population in low income in 2009, followed by St. John’s and Halifax. Toronto had the fourth largest low-income rate. Québec City and Regina had the lowest population shares in low income.
Success in reducing low income also varied by city. Seven out of the ten cities in the above chart reduced their MBM low-income rate between 2000 and 2009. The three exceptions were Toronto, Edmonton, and Vancouver. Not surprisingly, however, rates rose in most cities during the recent recession.
Who are the at-risk groups for low income?
Low income is more prevalent in certain at-risk groups. The recent House of Commons report on poverty identified 10 groups that were most at risk of experiencing low income: children, lone-parent families (particularly female lone-parent families), women, unattached individuals, seniors, Aboriginal people, people with disabilities, recent immigrants, visible minorities, and low-wage workers.18
After 20 years of dramatic reductions, Canada’s elderly poverty rate has been rising since the mid-1990s, a worrisome trend. Among the elderly, the biggest jump occurred in the group of elderly women. Between 2006 and 2009, nearly 128,000 more seniors were said to be living in low income. Of that amount, 70 per cent were women.
On the bright side, Canada’s record on intergenerational income mobility is much better than that of many of its peers. Income mobility can be seen as a measure of equality of opportunity. There is less relationship between a family’s background in Canada and the adult incomes of that family’s children. Only 19 per cent of a family’s disadvantage is passed on to their children. This means, for example, that if a family earns $10,000 less income than the average, the children will earn $1,900 less than the average. For a family in the U.S., the children would earn $4,700 less; in the U.K., the children would earn $5,000 less.
Do government taxes and transfers help to reduce inequality?
Yes. Personal income taxes and government transfers (such as social assistance, employment insurance, child benefits, and old age security) have helped to reduce income inequality. We can see this by comparing inequality using three income measures:
- Market income refers to the sum of earnings (from employment and net self-employment), net investment income, private retirement income, and the items under other income. It is also called income before taxes and transfers.
- Total income refers to income from all sources—including government transfers—but before deduction of federal and provincial income taxes.
- Income after taxes and transfers refers to total income less federal and provincial income taxes.
In 1976, the first year for which data are available, the Gini index was 0.38 using market income. When government transfers are added to income, the Gini index fell to 0.33—meaning that income inequality was reduced. When the effect of the tax system is included, income inequality fell again—the Gini index was 0.30.
But Canada’s tax and transfer system is not reducing income inequality as much as it did prior to 1994. The following chart shows how taxes and transfers have reduced the Gini index. Between 1976 and 1994, the effect of the tax and transfer system was to increasingly reduce income inequality. Since 1994, however, the trend has reversed. In effect, while the tax and transfer system still plays an important role in reducing income inequality, the redistributive effect of the tax and transfer system has grown weaker since 1994.
Another way of looking at the effect of the tax and transfer system is to compare average income levels of the poorest and richest groups before and after taxes and transfers. In 2009, the richest group had 24.6 times as much market income as those in the poorest group. After taking into account taxes and transfers, the richest group had 9.1 times as much income as the poorest group. This means that government taxes and transfers are reducing income inequality.
As we saw using the Gini index, however, the tax and transfer system is not reducing the income gap as much as it once did. In 1989, the richest group had 7.2 times more income after taxes and transfers than the poorest group. This increased to 9.1 times in 2009.
One explanation for the weaker impact of the tax and transfer system on income inequality in Canada is the restructuring of many programs that help to reduce inequality. For example, there has been erosion in the employment insurance (EI) program. One indicator of EI generosity is the beneficiaries-to-unemployed ratio. Ken Battle, Michael Mendelson, and Sherri Torjman estimate that this ratio fell from 82.9 per cent in 1990 to 47.8 per cent in 2009.19 This means that a smaller share of unemployed people are getting unemployment benefits.
Another possible reason is that welfare incomes are not as high as they were prior to 1994. For example, for a single parent with one child, average welfare income fell from nearly $18,200 in 1994 to just above $17,000 in 2009.20
Using the example of a lone parent with one child again and comparing the average welfare income in 2009 with the 2009 market basket measure low-income line, it is clear that this person would be considered in low income in every province. Welfare income is lower than the MBM low-income line all across Canada. The biggest gap is in Alberta, while the smallest gap is in Newfoundland and Labrador.
1 All income data on this hot topic webpage come from Income in Canada 2009 published by Statistics Canada.
2 Paul Krugman, The Conscience of a Liberal (New York: W.W. Norton and Company, 2009), 125.
4 Ibid., 3.
5 Ibid., 15.
6 Krugman, The Conscience of a Liberal, 130.
7 Ibid., 130.
9 David Card and John E. DiNardo, “Skill Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles,” Journal of Labor Economics 20, 4 (2002), 735
12 An overview of the differences between low-income lines can be found in Xuelin Zhang, Low Income Measurement in Canada: What Do Different Lines and Indexes Tell Us? Research Paper #75F0002MIE (Ottawa: Statistics Canada, 2010).
13 John Kenneth Galbraith, The Affluent Society (Boston: HoughtonMifflin, 1998), 235.
14 Standing Committee on Human Resources, Skills and Social Development and the Status of Persons with Disabilities, Federal Poverty Reduction Plan: Working in Partnership Towards Reducing Poverty in Canada (Ottawa: Standing Committee on Human Resources, Skills and Social Development and the Status of Persons with Disabilities, November 2010).
15 Richard Ball and Kateryna Chernova, “Absolute Income, Relative Income, and Happiness,” Social Indicators Research 88, 3 (2007), 497.
18 Standing Committee on Human Resources, Skills and Social Development and the Status of Persons with Disabilities, Federal Poverty Reduction Plan: Working in Partnership Towards Reducing Poverty in Canada (Ottawa: Standing Committee on Human Resources, Skills and Social Development and the Status of Persons with Disabilities, November 2010).
19 Ken Battle, Michael Mendelson, and Sherri Torjman, The Modernization Mantra: Toward a New Architecture for Canada’s Adult Benefits (Ottawa: Caledon Institute of Social Policy, 2006), 16. Data updated to 2009 by Ken Battle and sent to the Conference Board via email on July 4, 2011.
20 Data on welfare income come from the National Council on Welfare. Each province’s average welfare income was weighted by its population.