How to Decrease Income Inequality
[Originally published November 2013]
The Globe and Mail has been up in arms over the growing wealth divide in Canada. Or at least the perception of a growing wealth divide. As part of its Wealth Paradox series, this weekend’s edition looked at some policies aimed at reducing income inequality in the country.
Before assessing whether these measures will indeed reduce income inequality—and thus preserve what the Globe claims to be that “cherished” Canadian value of “equality of opportunity for all”—we should look at whether or to what extent income inequality is rising.
One way to measure income inequality is through the Gini index. This index looks at the statistical dispersion of incomes. Thus, a value of one indicates a maximal inequality of incomes, as would be case if one Canadian earned all of the country’s salaries. A value of zero indicates no inequality, and can be thought of as everyone earning the exact same amount. Stephen Gordon at Worthwhile Canadian Initiative posted this graph awhile back:
Two facts stand out. First is that most of Canada’s rising inequality occurred prior to 1995, and has been relatively constant since. (Even declining a little.) Second is that the trend in Canada seems to parallel other countries, such as the UK and Sweden. Notably all three countries and especially the latter have well-developed welfare states aiming to equalize the playing field through wealth and income redistributions.
This graph will cause unease amongst some, as there is a clear perception that income inequality is growing and that someone is getting a leg up on the rest of us. Partly this perception is because generally rising prices are impoverishing almost all of us, and partly it is a statistical anomaly. Some are getting wealthier at the expense of the rest of Canadians, but the group is so small so as to have little effect on the broader measure of income dispersal.
Writing for the Globe, James Mirtle laments that the price of hockey is steadily rising and the national pastime now risks becoming an option for only the upper class. Yet what Mirtle overlooks, and which many comments to the article point out, is that hockey was always an expensive sport.
The fact that it is more expensive now than it was in the past can be explained in three ways.
First, decades of steady inflation at the hands of the Bank of Canada have driven down the value of the loonie. As a result we have to pay more for all goods and services that we buy – hockey included. Second is that with some rising wealth in certain areas we see a change in preferences. The wealth effect sees increased spending on certain leisure activities as incomes increase. The price of vacations and steak have also risen much over the past 25 years, but I don’t read too many articles claiming this as a problem of income inequality in need of a solution. Finally, Canadians are having fewer children and one result is that parents are able to spend more to pamper them. The total fertility rate in Canada today stands at 1.63 children per couple. Contrast this with the 3.81 figure in 1960 and you can see that the average Canadian couple is now able to plough more money into their child’s development. This means they are willing and able to pay higher prices, and we should expect the prices of certain activities – like hockey – to increase as a result.
As part of its series, the Globe hosted a poll over the weekend to determine which policies would best reduce the effects of income inequality in Canad
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