By Tavia Grant
The Globe and Mail, Mon. Dec. 5, 2011
The gap between Canada’s rich and poor is growing amid shifts in the job market and tax cuts for the wealthy, according to a study that shows income inequality at a record high among industrialized nations.
A sweeping OECD analysis to be released Monday shows the income gap in Canada is well above the 34-country average, though still not as extreme as in the United States.
Income inequality is a hot topic these days, as mirrored by the Occupy movement’s concerns over the growing gap between the rich and the rest. Protesters aren’t the only ones preoccupied with the disparity; prominent figures from Warren Buffett to Nobel Prize-winning economist Joseph Stiglitz have also fretted over the growing gap, exacerbated by the recession and weak recovery.
“Income inequality increased during both recessionary and boom periods, and it has increased despite employment growth,” said Stefano Scarpetto, the Organization for Economic Co-operation and Development’s deputy director of employment, labour and social affairs, during a presentation of the report.
A growing wage gap carries significant economic consequences. Countries with greater income inequality tend to see shorter, less sustained periods of economic growth, an IMF paper this fall concluded.
“Greater inequality raises economic, political and ethical challenges as it risks leaving a growing number of people behind in an ever-changing economy,” the OECD paper said.
Its 400-page analysis, entitled Divided We Stand: Why Inequality Keeps Rising, a follow-up study to one released in 2008, delves into reasons behind the growing gap.
Canada in particular has seen a widening chasm since the mid-1990s. OECD research shows the average income of the top 10 per cent of Canadians in 2008 was $103,500 – 10 times than that of the bottom 10 per cent, who had an average income of $10,260, an increase from a ratio of 8 to 1 in the early 1990s.
The richest 1 per cent of Canadians saw their share of total income rise to 13.3 per cent in 2007 from 8.1 per cent in 1980.
Moreover, the richest of the rich – the top 0.1 per cent – saw their share more than double, to 5.3 per cent from 2 per cent. At the same time, the top federal marginal income tax rates tumbled – to 29 per cent in 2010 from 43 per cent in 1981.
Two factors explain Canada’s growing gap: a widening disparity in labour earnings between high- and low-paid workers, and less redistribution.
“Taxes and benefits reduce inequality less in Canada than in most OECD countries,” the study said.
Shifts in the labour market are a key reason why the gap is widening, Mr. Scarpetto said. The prevalence of part-time and temporary contract work is eroding wages. Technological progress has been more beneficial to high-skilled workers, while the gap in men’s earnings in particular is growing ever wider.
The gap in hours worked is growing too, as in other OECD nations. Since the mid-1980s, annual hours of low-wage workers in Canada have fallen to 1,100 hours from 1,300 hours, while those of higher-wage workers fell by less, to 2,100 from 2,200 hours.
Rising self-employment also played a role, as the self-employed typically earn less than other full-time workers. This explains more than one-quarter of the increase, the report said.
Taxation is another factor. Before the mid-1990s, Canada’s tax-benefit system was as effective as those of the Nordic countries in stabilizing equality, offsetting more than 70 per cent of the rise of market-income inequality, the report said. The redistributive effect has declined since then, so that taxes and benefits now offset less than 40 per cent of the rise in inequality.
The OECD report isn’t the only analysis of Canada’s growing income gap. A September study by the Conference Board of Canada found income inequality has been rising more rapidly in Canada than in the U.S. since the mid-1990s. Its analysis of 18 countries found that Canada had the fourth-largest increase in inequality between the mid-1990s and late 2000s.
There are social implications too, with more academic research linking income inequality with poor health outcomes. Last month, a study by Montreal’s public health agency found an 11-year difference in life expectancy between men who live in its poorest neighbourhood and those its richest.
The OECD report makes a slew of suggestions on how to narrow the gap. Taxing the rich more is one, along with closing loopholes and ensuring compliance with tax rules.
More importantly, the report said labour market outcomes could be improved by investing more in people – through education, skills training and job retraining programs. “More and better jobs, enabling people to escape poverty and offering real career prospects, is the most important challenge.”