Income Inequality: Canada and the U.S. Marching to Different Drummers

December 11, 2014
Jock Finlayson

Canada has long been known as a country that promotes the values of equity and fairness within our society. That helps to explain why the issue of economic inequality resonates with the media and among many of our political leaders. With a federal election expected sometime in 2015, inequality is sure to get more attention in the months ahead.

Globally, concerns over inequality are also on the rise. A recent article in The Economist magazine noted that 56 per cent of citizens in the advanced countries believe inequality is a problem. On most indicators, income inequality has indeed increased within a majority of industrial countries, although it has diminished at the global level owing to a long stretch of relatively strong economic growth in China and many other emerging markets.[1]

Much of the public and media discussion of economic inequality relies heavily on statistics and anecdotes drawn from the United States. This is problematic in the Canadian context, because the picture here differs in important ways from that south of the border.

Consider, first, the distribution of income among individuals and households. As documented in French economist Thomas Piketty’s influential book, Capital in the Twenty-First Century, the most affluent Americans have enjoyed stupendous increases in absolute income while also significantly boosting their share of the national economic pie in recent decades. Focusing on the oft-cited “top 1 per cent” of individual tax-filers, in the U.S. this small group accounted for almost one-fifth of total income in 2012, up from 17 per cent in 2009 and less than 15 per cent a dozen years ago.

What about the richest 1 per cent of tax-filers in Canada? According to Statistics Canada, they received slightly more than 10 per cent of total income in 2012, down from the historical peak of 12 per cent recorded in 2006. That is, the most privileged 1 per cent of the population took only half as big a slice of the income pie in Canada as in the United States. That’s a substantial difference. Moreover, while the American top 1 per cent has seen its share of overall income rise, in Canada the opposite appears to be the case, at least over the past several years.[2]

How to explain this pattern? Adjusted for population size, there are simply far more wealthy people and high income-earners in the United States. Tellingly, it takes a much bigger annual income – in excess of $100,000 more – to even enter the privileged ranks of the 1 per cent in the U.S. versus Canada. This reflects enduring differences between the two countries in size of market, the scale of economic and business activity (California’s economy is larger than Canada’s), the presence of relatively more large corporations in the U.S., and America’s unique role as the leading global centre for entertainment, professional sports, finance, technological innovation, top-tier universities, and cutting-edge scientific, medical and business research. An argument can also be made that social mores undergo a subtle shift when one crosses the 49th parallel. Public opinion surveys suggest that Americans are more accepting of private wealth and outsized incomes, and attach a higher value to material success, than their humbler neighbours to the north.

There is a second important Canada-U.S. difference that also bears directly on the issue of inequality: the extent of economic mobility across generations. Academic research confirms that a young Canadian born into a family of modest means – i.e., one in the bottom 20 per cent or 40 per cent of all households, ranked by income – is more likely to complete post-secondary education, and to move into a higher income category as an adult, than a similarly placed person in America. In other words, Canada outperforms the U.S. on intergenerational economic mobility.[3] Canada has managed to fashion a society where, compared to America, the circumstances of an individual’s birth seem to carry less weight in determining his/her subsequent place on the economic ladder as an adult. A better public school system and universal health coverage for the population are likely among the factors that account for Canada’s higher rating on intergenerational mobility. These are advantages we should acknowledge and seek to retain.

But at the same time, we should be wary of importing, willy-nilly, the prevailing American discourse on economic inequality. Canada’s experience is sufficiently different to matter, and the trends pointing to greater inequality in the United States are not fully mirrored on our side of the border.

[1] F. Cingano, “Trends in Income Inequality and Its Impact on Economic Growth,” OECD, Social, Employment and Migration Working Papers, No. 163, 2014.

[2] Statistics Canada, “High-income trends among Canadian tax-filers, 1982 to 2012,” The Daily, November 18, 2014.

[3] Miles Corak, “Income Inequality, Equality of Opportunity, and Intergenerational Mobility,” Journal of Economic Perspectives, Volume 27, Number 3, Summer 2013.

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