Canada has a larger prosperity problem than an income inequality problem

September 2, 2023
David Williams

It can be tempting to follow American policy discussions 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.

The best-known measure of income inequality is the Gini coefficient. It measures income dispersion across households: the closer it is to one, the more concentrated are incomes; the closer it is to zero, the more equally distributed are incomes. It can be calculated for market (pre-tax) incomes and disposable incomes (after taxes and transfers). Note that the Gini metric 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 how incomes are dispersed.

Statistics Canada data shows that after rising during the 1980s and 1990s, Canada and B.C.’s Gini coefficients for both market and disposable incomes have been falling since the early 2000s. Household incomes havebecome more equal over the past two decades, in other words, regardless of whether we mean incomes before or after taxes and transfers.  

We can also examine Statistics Canada data about the top and bottom of the income distribution. At the low end, the share of households living in poverty has been declining in Canada and B.C. since the early 2000s. At the top end, the share of income accruing to the top 10 per cent, 5 per cent and 1 per cent of earners has been flat or declining since the 2000s. Thus, for about two decades, household income inequality in Canada and B.C. has been getting better, not worse, across a variety of metrics.

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 product and labour markets, skills training, and encouraging 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 prefer to talk about disposable income inequality, which is addressed through the tax and transfer systems. Canada and B.C. should strive for an overall tax system that is “progressive, simple and efficient.” Our serial lack of income generation indicates there is an imbalance between these three objectives. Simplicity and efficiency should be as important as progressivity. While 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 disappears into the “underground economy.” A balance must be struck, and the lack of average income growth across the economy indicates our governments have not found it.

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 dwelling prices and housing markets, not wages and labour markets.

A country 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 2020-60, with the lowest rate of per capita economic growth. The principal reason is that Canada is expected to rank 7th last and dead last for productivity growth over 2020-30 and 2030-60, respectively. Consequently, young and aspirational Canadians face 40 years of stagnation in average real incomes.

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

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 politicians and 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.

David Williams, DPhil, is Vice President of Policy at the Business Council of British Columbia.

As published in The Orca.

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