Income inequality has fallen for twenty years in Canada and B.C.

It can be tempting to follow American policy debates and presume that Canada and B.C. are similarly challenged by rising income inequality. However, the data does not support that assessment. Canada is not like the United States when it comes to the distribution of household incomes.

Income inequality has fallen in Canada and B.C. for past two decades

After rising during the 1980s and 1990s, overall income inequality as measured by the Gini coefficients for households’ market and disposable income has been falling in Canada and B.C. since the early 2000s, according to Statistics Canada data (Figure 1) [1]. Household incomes have become more equal over the past twenty years, in other words, regardless of whether we mean incomes before or after taxes and transfers.

Figure 1

We can also examine what has happened at the top and bottom of the income distribution. At the low end of the income distribution, the share of households living below the poverty line has been falling in Canada and B.C. since the early 2000s (Figure 2). At the top end of the income distribution, the share of income accruing to the top 10%, 5% and 1% of earners has been flat or declining since the 2000s (Figure 3 and 4). The corollary is that for about two decades, household income inequality in Canada and B.C. has been getting better, not worse, across a variety of metrics.

Figure 2

Figure 3

Figure 4

Sharing prosperity is a strength

Canada and B.C.’s tendency to share prosperity is a strength and we should remain vigilant about income inequality.

Concerns about market income inequality should be addressed through microeconomic reforms of labour and product markets, workforce skills development, and encouraging higher levels of business investment in productive assets across the economy. Regrettably, policymakers rarely talk about market income inequality across households, possibly because addressing it might entail politically challenging and technically complex structural reforms.

Policymakers generally prefer to talk about disposable income inequality, which is addressed through the tax and transfer systems. Canada and B.C. should strive for a tax system that is, in an overall sense, “progressive, simple and efficient.” Our serial lack of income generation indicates there is presently an imbalance between these three objectives. Simplicity and efficiency should be as important goals as progressivity. Just as personal taxes should rise with a person’s capacity to pay, personal taxes are also levies on work and skills. In taxing something, we get less of it – and governments end up with less tax revenue as economic activity is forgone, shifted elsewhere, or shifted to informal channels (i.e., the "underground economy). A balance must be struck, and the lack of real average income growth across the economy indicates our governments have not found it.

What about wealth inequality?

It is right to be concerned about wealth inequality too. However, since real estate makes up most of households’ non-pension assets, concerns about wealth inequality mostly relate to developments in established (resale) home prices and housing markets, not wages and labour markets.

To share prosperity, a country must first generate it

A country or province cannot redistribute income that it does not generate.

The OECD projects that Canada – and by extension B.C. – will be the worst performing economy out of 38 advanced countries over both 2020-30 and 2030-60, with the lowest growth in real GDP per capita (i.e., real income per person). The principal reason is that Canada expected to rank 7th last and dead last for labour productivity growth among OECD countries over 2020-30 and 2030-60, respectively (Williams, 2021; Williams and Finlayson, 2022). As a result, young and aspirational Canadians face 40 years of near-stagnant average real incomes.

Canada and B.C. are on track to meet the OECD’s dismal projections. Canada's recovery from the pandemic downturn was the 5th weakest of any advanced country, and we are one of only 7 OECD countries that has still not recovered its pre-pandemic level of real GDP per capita. BCBC projections based on the federal budget show Canada's real GDP per capita will not recover its 2019 level until at least 2027! While B.C.’s GDP per capita has at least recovered its 2019 level, provincial budget forecasts show it falling over the next 5 years, meaning it will be lower in 2027 than in 2022 (Williams, 2023).

Household income inequality in Canada and B.C. has been falling for about two decades across a range of metrics. This contrasts with what some of our politicians and media commentators seem to believe. They need to absorb a little less American commentary.

To put it plainly, Canada and B.C. are good at sharing prosperity – our challenge is our inability to generate prosperity in the first place. This is where our political class in Ottawa and Victoria must turn their attention.

[1] The Gini coefficient is a widely used measure of income dispersion, pioneered by the Italian statistician, Corrado Gini, in 1912. It ranges between zero and one. A coefficient of zero indicates a perfectly balanced income distribution where all households have the same income. A coefficient of one indicates a perfectly concentrated distribution where one household has all the income. The coefficient can be calculated across households based on their market income (before taxes and transfers) or disposable income (after taxes and transfers). Note that the Gini coefficient says nothing about absolute income levels. A high-income country can have the same Gini coefficient as a low-income country. The Gini coefficient only measures the dispersion of income across a population.