Who is the fairest one of all? Part II

BCBC recently released its inaugural British Columbia Prosperity Index. One of the twelve indicators that make up the index is income inequality. A previous blog explored the data for Canada in more detail.

B.C. has the second most even distribution of market incomes and the sixth most even distribution of disposable incomes among the Canadian provinces, according to Statistics Canada data. The data suggests that B.C. does a good job in sharing the fruits (i.e. income) flowing from economic prosperity. Let’s now look at how the income distribution has changed over time in Canada and B.C.

Incomes have become more evenly distributed since the early 2000s

Figure 1 plots the Gini coefficients for market and disposable incomes for B.C. and Canada annually from 1976-2017 (see the previous blog for discussion of these concepts).

Figure 1: Income distributions have become more even since the early 2000s, especially in B.C.

The Gini coefficient measures the dispersion of income across the population. It ranges between 0, indicting a perfectly-even distribution, and 1, indicating a perfectly-concentrated distribution.
Source: Statistics Canada.

The chart highlights several interesting points:

1. There is always a sizable difference between the Gini coefficients for market and disposable income. This indicates that the system of taxes and government transfers, including fiscal equalization across provinces, is effective in re-distributing market income.
2. B.C. has less market income inequality than Canada. There are only two years – 2002 and 1985 – where market incomes are more concentrated in B.C. than for Canada.
3. B.C. and Canada almost always exhibit similar Gini coefficients for disposableincome (i.e. distributions of disposable income are almost always similar). Again, this indicates that taxes and government transfers, including fiscal equalization, are effective in re-distributing market income.
4. Market and disposable incomes became more concentrated from the 1970s to the early 2000s for both B.C. and Canada, as indicated by the rising Gini coefficients. This was a period of major restructuring in the Canadian economy and the opening of new economic opportunities (e.g. due to the North American Free Trade Agreement (NAFTA) and the deregulation of the transport, telecommunications and financial sectors). However, the rise in the disposable income Gini coefficient during this period is only about half as large as that for market income. This again suggests that taxes and government transfers did a good job of mitigating income inequality during this period.
5. Canada’s Gini coefficients peaked in 1998 for market income and in 2004 for disposable income. There has been a modest decline income inequality since then.
6. Income inequality peaked in B.C. in 2002 and has been steadily declining since then. The decline for B.C. has been more pronounced than for Canada. As at 2017, income inequality in B.C. had returned to around the levels of the mid-1990s.

Canada and B.C. have relatively well-balanced income distributions

It can be tempting to read American news or policy discussions and assume that Canada faces similar challenges around income inequality. The data does not support that assessment. Although income inequality did increase in Canada and B.C. during a period of structural change from the 1970s to the early 2000s, it has now been in decline for almost two decades. The extent of income inequality in B.C. is back to where it was in the mid-1990s.

B.C. has the second most even distribution of market incomes and the sixth most even distribution of disposable incomes among the Canadian provinces. Moreover, as a country, Canada compares well internationally on measures of income inequality. Among the G7 countries, Australia and New Zealand, Canada has the lowest Gini coefficient for the distribution of market incomes and the third lowest for the distribution of disposable incomes (see Figure 4 in Policy Perspectives).

We will conclude by reiterating the findings of our recent Policy Perspectives:

An economy that can deliver rising GDP per person is able to provide a rising tide of economic prosperity and opportunity for its citizens. This is especially true for a country like Canada given its relatively well-balanced distribution of income.

Canadians have seen the largest deterioration in living standards relative to peer countries over the current business cycle from 2007 to 2018. This is primarily because peer countries have increased their productivity by more than Canada.

The challenge facing Canada appears to be much less of a problem of sharing economic gains and much more of a problem generating them in the first place.