Dynamics of Income inequality Gap in Canada

Dynamics of Income inequality Gap in Canada

Author

Institution

Introduction

Issues pertaining to income inequalities have always been considerably controversial in many countries. This is mainly because income comes as an indicator of varied other aspects of a country such as leadership, growth, as well as investment among other aspects. In addition, it comes off as an indicator of the results of the policies that the government of the day may have been applying, in which case it shows their failures and successes. Income inequality is a term that is used to underline the extent to which a country’s income is unevenly distributed among the populace. It comes as a crucial companion statistic to what is known as income per capita. Income per capita measures the amount of income that a country has rather than the distribution of the income. It is worth noting that the national average often masks the income inequality that a certain country is experiencing. Underlining the importance of determining the income inequality of a country is the questions that high inequality triggers. The first question revolves around the impact of income inequality on a country’s economic wellbeing (Crompton & Michael, 2000). Scholars note that the high inequality may lower the economic growth especially in instances where it is an indication of less-than-optimal utilization of capabilities and skills of the citizens by the country, or in cases where it results in increased social tensions thanks to undermining social cohesion. The second question revolves around social justice and fairness.

For quite a number of years, countries in general and Canada in particular has been striving to eliminate the gap between the rich and the poor, or at least reduce it. Numerous statistical studies have been done trying to examine the dynamics of these efforts tracing the gaps right from the 20th century to the 21st century. In spite of the results that may be produced by statisticians or researcher, the question remains on their implications or rather what information they hold pertaining to income inequality dynamics in Canada (Crompton & Michael, 2000).

A study done in 2009 painted a deeply disturbing picture pertaining to the level of inequality. In 2005, studies showed that the richest 10 % of Canadian families were owners of close to 60% of the entire wealth held by in the household sector (Statscan, 2011). This meant that the rest of the population, making up 90% owned about 40% of the entire household wealth. In addition, statistics showed that individuals taking the bottom 20% had a debt of about $7,800, while another 14% owned less assets than their debts. 24 % did not have any financial asset (Statscan, 2011).

Research statistics done in 2009 did not paint a better picture. According to Investor Economics, inequality increased in significant amounts since 2005. The 2009 study identified a total of 544,000 households of high net worth in Canada. As much as these families represented about 3.8% of the entire population of Canadian families, they were shown to be controlling about $1.78 trillion of the entire financial wealth in Canada. This represents about 67% of the total Canadian households’ financial wealth. Researchers in this study noted that the generation of rich Canadians was claiming or occupying a larger percentage of the economic growth than or compared to any generation before it. In fact, the report pointed out that the richest 1% had increased the percentage of total income that it held by almost 100%, with the richest 0.1% having increased the percentage of total income that it held by almost three times since 1970. On the same note, the country’s richest 0.01% had increased the percentage of income that it held by about 4 times.

In addition, the research showed that the richest 1% of Canada, which is represented by the 246,000 privileged individuals that had an average income per year amounting to $405,000 were responsible for about 32% (almost a third) of the income growth for the decade from 1997 to 2007.

In 2010, the figures seemed to have changed significantly. According to data from Statistics Canada (Statscan), the richest 1% was taking up about 10.6% of the total income of Canada, which was considered to have been a considerably large share compared to the 8% share of early 90’s or the 7% of the early 80s. It, however, was a drop from the 12.1% share that had been reported in the early 2000s.

Comparative trends have painted a clear picture pertaining to the growing levels of inequality. According to a 2009 report by the Conference Board of Canada, the top fifth increased its share of national income from 35% to 39% for the period between 1993 and 2008. The trend was attributed partly to the nature of work that tended to increase its rewards for individuals who had specialized skills that were on high demand. This was also blamed on the globalization that tended to shift well-paying jobs, financial speculation, as well as government programs that were not as successful in eliminating inequality as they were before. A report by the Conference Board examining the different inequality measures noted that for the years between 1976 and 2009, there was a 5.5 % increase in the median income. As much as the poor did not become poorer in line with the levels of real income, the contrary stands true in terms of relative poverty. The report noted that the earnings gap for the same period between the top 20% earners and lowest 20% earners increased from approximately $92,300 to $177,500, which was an indication of an unequal distribution of income.

Other than determining the dynamics of the gap between the rich and the poor using levels of income, scholars have also used the Gini index or Gini coefficient. This, in fact, comes as the most commonly used technique or measure of income inequality, presenting the results on a scale of zero (0) to One (1). The Gini index undertakes the calculation of the extent or magnitude by which the distribution of  income among people of a certain country deviates from what may be termed as “exactly equal” distribution. When the Gini coefficient is at zero (0), it reflects exact inequality, where every individual in that country would be having similar income amounts. When the Gini coefficient rests at one (1) it reflects total inequality in the society where a single individual in the country takes up all the income while the other people do not have any income.

Using this measure of inequality, statistics show that inequality in Canada went down in the 80s, as the Gini index attained a low figure of 0.281 in late 1980s. However, income inequality went up to 0.32 in the 1990s and has taken the same amount in the 2000s (Marshall & Vincent, 2007).

On the same note, researchers have attempted to track income inequality through dividing the Canadian population into five (5) equal groups representing the poorest through to the richest in the bottom quartile and the top quartile respectively. They then calculated the percentage of income that every group has (Marshall & Vincent, 2007). Equal distribution would be represented in a situation where every group has an equal percentage of the total income, which is 20%. However, their presentation showed that the top quartile (representing the richest income group) took up about 39.1 percent of Canada’s total income. On the same note, the top quartile was the only quartile that had experienced an increase in the percentage national income in the last two decades having risen from 36.5% to 39.1% in 1990 and 2010 respectively. It is noteworthy that the other groups had lost their share of national income within the same period (Statscan, 2011).

In the Statscan report, there was an increase in the gap between the earnings of the top 1% and all other people in the period between 1980 and 2010. In 1982, the top 1% had a median income that was seven times higher than that of the 99% at the bottom. This median income increased by 2010 where the top 1% had an income that was ten times that of the 99% percent. These figures were unlikely to change with the top 1 % being likely to remain in that position especially considering that in 1982, about 67% of the individuals at the top 1% remained in the position even a year later. This number rose to 72% by 2010 (Statscan, 2011).

The Canadian Center for Policy Alternatives noted that as much as there are variations or differences in the levels of inequality, all provinces in Canada had increased their levels of inequality. It noted that the individuals at the bottom 90% of income earners in the largest metro areas in Canada were making less amounts of money than they used to make in 1982 adjusted to inflation. Vancouver, Montreal and Toronto saw a drop in income for the bottom 90 % income earners by $224, $1,900, and $4,300 respectively. On the other hand, individuals in the top 1% in these same cities had a pay increase of $162,000, $297,000 and $189,000 respectively.

However, it is noteworthy that the figures do not indicate or imply that the average Canadians are worse off or poorer than they were three decades ago. In fact, their average income adjusted to inflation has risen from 1976 to 2009 by about 17 percent from $51,100 to $59,700. It is worth noting that the amounts presented are in real dollars in which case the income figure of 1976 has been converted into that of 2009 dollars through adjusting it for inflation. However, average income does not make a credible measure as to the lifestyle or quality of life led by a majority, in which case analysts suggest that median income should be used in their stead. Median incomes divide the distribution of income into two similar or equal groups. While the lowest and highest values may distort the average income, the same cannot happen in the case of median income as it is the group’s middle value.

For the period between 1976 and 2009, median income experienced an increase from $45,800 to $48,300, a considerably modest increase of just 5.5% in the 33 years period. In addition, there was an increase in the gap between median income and average income, which essentially signals unequal distribution of income growth (Statscan, 2011).

However, questions arise as to exactly what forces may be blamed for the increased inequality in the income levels. Scholars note that the trends may be blamed on two forces namely institutional forces and market forces.

Economists such as Paul Krugman state that the increased level of inequality may be blamed on institutional forces such as declining rates of unionization, deregulation, stagnant minimum rates of wages, as well as national policies that seem to favor individuals in the top quartiles. Still in this line, the scholars note that the decreasing top marginal rates of tax come as an explanation for the increased incomes of the top 1% of the Canadian population (Blau et al, 2006). They dispute the notion that globalization and skill-biased technical change were to blame for a large part of the increasing income gaps citing deficiency of unicausal explanation.

However, the second group cites market forces especially increased globalization and skill-biased technical changes, which have increased the demand for specialized or highly skilled labor. Scholars note that the new technologies have increased the demand for individuals who are well educated and brainy (Gunderson & Daphne, 2005). The increased incorporation of well-educated and brainy individuals in the industry hit the less educated individuals in the rich world with unusual competition. The influence of globalization is underlined by the fact that allowed corporations to shift production and purchasing to jurisdictions that had the lowest cost, thereby placing enormous downward pressure on salaries and wages for a large number of Canadian workers (in the lower ranks), as well as reducing the unionization (Cranford et al, 2003). On the same note, it is credited with creating an entirely new class of super-wealthy individuals. These individuals differed from the super-wealthy individuals of the past in the fact that they did not get their wealth from property and inheritances, rather from bonuses, rewards and stratospheric salaries as investment bankers, entrepreneurs, inventors, corporate CEOs, artists and athletes.

On the same note, taxation policies have been responsible for the increase in the inequality gap. Both provincial and federal governments in Canada have made numerous tax cuts thanks to the proliferation or increase in right-wing think tanks (Cranford et al, 2003). Researchers note that the federal corporate and personal taxes have been reduced since 2000 by about $320 billion, with the provinces making similar moves. At the same time, the tax brackets been reduced by almost half from 80% in 1948 to 42.92% in 2009. Scholars note that from 1990 to 2005, there was a reduction in the taxes levied on the richest 1% individuals in Canada by about twice the amount of reduction for the average Canadians in line with the “ability to pay” taxation policy. It is noteworthy that, currently, individuals falling under the category of richest 1% of taxpayers remit lower tax rates than the 10% poorest taxpayers. These factors seem to have favored the rich and allowed them to make more savings than the individuals at the lower echelons of the income ladder (Salverda et al, 2009).

A large percentage of Canadians feel that the statistics, while true, are not acceptable at all. They feel that such inequalities go against the values of that hold Canadians together, in which case they have sought strategies that would resolve this. Scholars note that the income inequality may be reduced through a shift in the power balance. It is worth noting that market incomes polarization are responsible for the growing income inequality. In essence, tackling it would necessitate a shift in the balance of power between employers and workers in the society whereby income would go to wages rather than profits (Salverda et al, 2009). This can be enhanced through reforming labor laws so as to increase the ease of unionization, enforcing and strengthening employment standards in order to ensure the payment of vulnerable workers irrespective of their status. It is imperative that measures are taken to ensure that the distribution of earnings is equalized in the labor market (Blau et al, 2006). The polarization of workers earnings has resulted in the inequalities as CEO have mind-boggling packages, constant wages for the middle class and the persistently low earnings of the poor alongside their increasingly precarious arrangements at work. In line with this, scholars propose that incomes should be pegged or annexed to the rate of inflation, as well as set at such a level that prevents any full-year full-time worker is poor (Salverda et al, 2009). On the same note, it is imperative that immigrants or foreign workers are allowed to have or enjoy rights and privileges similar or equal to those of the indigenous ones. Employers seek the services of foreign workers in an effort to substitute Canadian workers who have vouched for adequate wages. It is imperative that legislations are made making it illegal for any employer to pay a worker less than the average level by more than 15 percent so as to harmonize the incomes (Marshall & Vincent, 2007).

In conclusion, income inequalities have been an emotive topic in many countries. This is because of the implications it has on government policies. In Canada, statistics reveal that the rate of inequality has been increasing in the last several decades. As much as the incomes of individuals may have increased and even enhanced the lives of the Canadians, there are still wide disparities between their incomes (Blau et al, 2006). This has been blamed on varied issues especially globalization, as well as taxation systems. Scholars note that taxation for individuals falling in the high echelons of income has reduced at a relatively larger rate than that of the individuals at the bottom. This has been complemented by the fact that globalization has increased the demand for specialized skills, and put pressure on unionization, in which case corporations can lower the salaries and wages of individuals at the bottom while increasing those of CEO and others (Blau et al, 2006). This increases the disparity in the earnings of the two groups (Ehrenberg et al, 2004). Nevertheless, scholars have proposed varied strategies that would allow for the reduction of the gap between the rich and the poor. They note that the key culprit in this regard is the polarized earnings between the two groups, which leaves them at different levels of vulnerability. In essence, it is imperative that the salaries of individuals are pegged or annexed on inflation, in which case they would never fall below a certain point. On the same note, it is imperative that labor laws are amended so as to hinder corporations and employers from paying below a certain wage (Ehrenberg et al, 2004). This is especially with regard to foreigners and immigrants who are taken in an effort to substitute the Canadian workers who have demanded more adequate wages.

References

Statscan, (2011). The Daily — High-income trends among Canadian taxfilers, 1982 to 2010. Web retrieved from HYPERLINK “http://www.statcan.gc.ca/daily-quotidien/130128/dq130128a-eng.htm?HPA” http://www.statcan.gc.ca/daily-quotidien/130128/dq130128a-eng.htm?HPA

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Gunderson, M & Daphne, G. T (2005). “Labour History and the Development of Modern Capitalism.” Toronto: Pearson.

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