Young Economics.

Economic inequality in Canada

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Professor Gordon at the great Worthwhile Canadian Initiative comments on economic inequality in Canada:

The increase in the income share at the top end of the top end of the distribution is sometimes expressed in terms of the gains in the top quintile (top 20%) or the top decile (top 10%). But it’s clear that the real winners since 1985 are those above the 99th percentile. And even within this group, the gains are concentrated at the upper end:

Income growth by percentile

It’s important to make this distinction. As a matter of statistics, it’s perfectly true that people who are in (say) the top 10% have received the lion’s share of gains to national income. But people who are at the 90th or even the 95th percentile could fairly object to such a broad brush, because they – like the people at the median – haven’t seen much in the way of increases in income either. So when you talk about ‘the rich’, it’s important to restrict attention to those making (say) $400-500k/yr or more.

Everything Prof. Gordon says is true.  All the action in economic inequality in recent decades has been at the very, very top of the distribution, and it’s important to keep that fact in mind when discussing inequality.  However, the other side of that same coin is the inaction in the rest of the distribution.  Look at this graph from Osberg (2008):

Real wageI think this is one of the most striking images in empirical economics.  (It includes the total value of all hourly compensation.)  It emphasizes two points.  First, the trend toward a more unequal income distribution since approximately 1980 is not merely a matter of the super high-income jobs (financiers, professional athletes and star entertainers) experiencing very fast wage growth.  It is an essentially distributional issue; around 1980 there was some significant change in the mechanisms by which national income is distributed across the labour force, a change that caused the income gains for some jobs to rise dramatically and the gains of the rest of the economy to more or less end. Second, this change in society’s distributional mechanisms was a radical departure from the pre-1980 economic regime.

It’s important to take note of both aspects of the economic inequality trend — the rise in incomes in the top percentile, and the stagnation of the rest of the distribution — because they both have implications for how we should address the issue.  I think that the stagnation of real income for most of the income distribution is a more significant problem than the mere fact that measured inequality is rising due to gains at the top end.  To solve this, we have to figure out exactly what changed around 1980 to cause the sudden shift in the distribution mechanisms in Canada (and the US and much of Europe).  Meanwhile, the fact that most of the income gains are going to a very small part of the population might limit the degree to which redistributive taxation can reduce inequality.  The super-rich tax base is pretty small, so extracting a lot of revenue from them would require very high tax rates that would probably have significant incentive effects.  In particular, it would make Canada even less attractive (relative to the US) for high earners.

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Written by Alex

August 16, 2009 at 8:57 pm

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