Contrary to conventional economic wisdom, inequality is no friend of the economy. Recently, the OECD estimated that increases in inequality in Canada during the 1990s are now costing our economy about $62 billion annually. That’s over 3% of GDP!
Evidence showing the negative impacts of inequality on our health and well-being have been mounting for well over a decade. For these reasons and others, it’s worth understanding the nature of inequality in our country.
However, there are some that are either confused themselves or are determined to confuse us on this issue. Below I list three tell-tale signs that someone is is likely misleading you about inequality in Canada.
Photo by Thomas Hawk
1) They don't mention the richest 1%
The Gini coefficient is a very important measure of inequality, but it is not the only measure we need to get a complete picture of inequality in Canada. Another measure, which is at least as important, if not more important, is the share of income that goes to the richest Canadians.
Because of how it is calculated, the Gini coefficient does not do a very good job of capturing changes in relative income among Canada’s richest and poorest. It is better understood as a useful measure of the strength of our middle class. It will not capture an elite 1% pulling away from the fold.
2) They only consider the
last 10 years
The share of income going to the top 1% continued growing, even when the trend in the Gini coefficient was flat in the late 1990s and early 2000s. But, between 2006 and 2012, the share fell by about 2 percentage points. This leads some to claim that there is no need for concern about inequality in Canada.
There are 22 leading OECD countries whose after-tax gini coefficients are lower than ours. These are the countries that we should be comparing ourselves to
But when experts talk about threatening increases in inequality in Canada, they are not talking about the last few years, they are talking about the last 30 years. In 1982, the richest 1% of Canadians received about 7.1% of all income. By 2006, this number had risen by more than 70%, to 12.1%. In 2012, it remained above 10%. As evidenced in the graph above, long-run trends in the Gini have also been disconcerting. While it’s true that the Gini has not risen in 15-20 years, it rose dramatically in the 1980s and early 1990s.
3) They compare Canada to the United States
Inequality is much lower in Canada than it is in the United States. This leads some people to suggest that not only is there no cause for concern about inequality in Canada, but that we are actually doing pretty well.
But doing better than the United States on inequality does not make Canada a world leader. This is because the United States’ record on inequality is, by international standards, a joke. Mozambique, Jamaica, Philippines, Georgia and countless other poor and middle-income countries have lower inequality than the United States. According to the World Bank, the United States ranks 124th out of 156 nations on inequality.
Comparing ourselves to the United States is a comparison to the worst possible example. There are 22 leading OECD countries whose after-tax gini coefficients are lower than ours. These are the countries that we should be comparing ourselves to. These are the countries that threaten to out-compete us on the world stage.
TABLE 1: Gini coefficient, after taxes and transfers (Source: OECD)
Recent research from the OECD shows that the increases in inequality we experienced in the 80s and 90s captured by the Gini coefficient are costing us dearly. Our only saving grace over the last few decades has been that inequality tended to increase in other countries at the same time that it did in Canada.
Throughout the world, countries are beginning to connect the dots between inequality, well-being and their economies. If Canadians fail to understand the true nature of the challenges posed to us, we risk failing to act and, ultimately, we will fall behind
Throughout the world, countries are beginning to connect the dots between inequality, well-being, and their economies. If Canadians fail to understand the true nature of the challenges posed to us, we risk failing to act and, ultimately, we will fall behind. Fortunately, more and more economists, world leaders, policy-makers and even banks agree that something must be done about rising inequality in Canada. Keeping in mind these three signs of a misleading article will help us avoid false arguments and allow us to concentrate on real solutions.
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