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Misleading Income Inequality Statistics

Appeared in the Financial Post
Authors:
Release Date: May 2, 2008

Yesterday Statistics Canada, with the aid of the media, perpetuated the old cliché that the rich are getting richer and the poor are getting poorer.

Earnings between 1980 and 2005 “rose for those at the top of the earnings distribution, stagnated for those in the middle and declined for those at the bottom,” concluded Statistics Canada. The Globe and Mail spun that into, “those at the top end got a lot richer…and those at the bottom got much poorer.” And the Canadian Press headline screamed, “Rich get richer, poor get poorer.”

It’s a good media story to be sure, but it’s simply not true. The reality is that those who were considered “poor” are in fact better off today than they were in 1980. And even more significant, individuals and families that were considered “poor” in 1980 are not the same ones who are “poor” today.

The reality for most Canadians is that where we are now is not where we were then, nor where we will be in future. Failure to incorporate Canadians’ income mobility into an analysis of income inequality results is a misleading depiction of reality. 

Start with what Statistics Canada actually measures. They divide Canadians into five income groups based on their employment income levels with each group representing one-fifth (20%) of the total number of workers. They then examine changes in median earnings for the five income groups over time.

Statistics Canada finds that between 1980 and 2005 median earnings among the top 20 per cent of earners increased by 16.4 per cent while the median earnings among those in the bottom 20 per cent decreased by 20.6 percent. In dollar terms, the median income among the bottom 20 per cent was $19,367 (in today’s dollars) in 1980 and a mere $15,375 in 2005. In other words, the median “incomes” of the bottom 20 per cent decreased by almost $4,000.

But before we hit the streets in protest, a closer look is warranted.

First, Statistics Canada only examines “earnings” or employment income. That is, they do not consider all other forms of income including retirement income, investment income, and government transfer payments.

Naturally, individuals and families in the bottom income group receive significantly more of their total income from government transfer payments than middle or upper income groups. These transfers include Old Age Security (OAS) pensions, employment insurance, child benefits, and GST tax credits. In fact, more than one-half ($52) out of every $100 received by families in the in the lowest income group comes from government sources. Clearly, the Statistics Canada measure has the potential for grossly understating real income at the bottom end.

When we examine income inequality using total income, the conclusion that the poor are getting poorer disappears. Specifically, median total income of those in the bottom 20% actually increased from $21,134 in 1980 (in today’s dollars) to $24,379 in 2005, an increase of $3,245.

Second and more significant, Statistics Canada failed to examine or mention income mobility in their latest report. Analyzing a snapshot of the income distribution at two points in time gives us absolutely no insight into the true degree of income inequality.

Consider that most young Canadians start out in the low-income group and work their way up to the middle or high-income group. Given their initial lack of experience, their incomes start out low. Their incomes peak when they hit middle age, the prime earning years, and then begin to fall as they approach retirement.

The result is that there is less inequality over time because many families will initially have low incomes followed by middle incomes and possibly high incomes as they move through their life cycles.

Consider evidence from another Statistics Canada report, Income in Canada 2005, which shows that 12.8 per cent of Canadian families were in the “low income” group in 1999, but most families moved out of low income within six years. Specifically, from 1999 to 2004, only 2.2 per cent of Canadians remained in low income for all six years.

Climbing the income ladder in Canada is not a fantasy. Indeed, the fantasy is that there is a large and permanent underclass which is getting poorer.



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