Responses from a number of prominent Canadians to the Fraser Institute’s recent study, Measuring Income Mobility in Canada, reveal a great deal about the differing views on social policy and the state of the debate regarding inequality.
The highest-ranking parliamentarian to respond was the NDP’s finance critic, Ms. Peggy Nash, who argued that mobility and inequality were two separate issues that should not be connected and that the real issue was the “growing gap between those at the top and those at the bottom.”
Ms. Nash’s comments reveal two significant problems in the discussion of inequality and social policy more broadly. They assume that people are stuck in their current situation and that we should, therefore, worry about static comparisons of income at any given point of time. Prominent Toronto radio host John Moore echoed such views when he asserted that some poor people do manage to lift themselves out of poverty but it’s not the norm.
Even University of Ottawa Professor and Canadian Research Chair Michael Wolfson claimed that the “reality of precarious jobs amongst the poor… are ignored by the Fraser Institute as it tries to perpetuate the Horatio Alger, ‘rags to riches’ myth.”
The evidence reported in our study, which is corroborated by previous research including work completed by a collaborator of Professor Wolfson, shows that the people experiencing low incomes today are overwhelmingly not the people experiencing low incomes tomorrow. Specifically, 83 per cent of Canadians initially in the bottom 20 per cent of income earners in 1990 moved to a higher income group by 2000. By 2009 (the last year for which we have data), 87 per cent moved up. In other words, nearly nine out of 10 Canadians who started in the bottom 20 per cent had moved out of low-income.
Ignoring mobility and the incentives related to promoting it (or discouraging it) can and has led to extraordinarily damaging policies. In the late 1980s, most provincial governments began increasing welfare benefit rates to the point where they markedly exceeded what an individual could earn from low-pay work. While based on good intentions, the result was a strong incentive for people to choose welfare over work. The result was that welfare dependency hit 10.7 per cent of the population in 1994, representing 3.1 million Canadians.
The second problem illustrated by Ms. Nash’s comments, which were echoed by David MacDonald of the Canadian Centre for Policy Alternatives, is that the gap between the rich and the poor is widening. This conclusion, however, which MacDonald characterized as “the rich stay rich and everyone else churns around in the bottom” totally ignores what’s actually happening to individual people’s income over time.
Our study tracked the income gains of the same people by their initial income group. Individuals who started in the bottom 20 per cent in 1990 experienced an average increase in their inflation-adjusted income of $38,100. People who started in the top 20 per cent, on the other hand, gained an average of $17,700 in inflation-adjusted earnings over the same period. This clearly demonstrates that those initially in the bottom 20 per cent experienced the largest dollar and percentage gains in income (after inflation). It’s difficult to observe such gains in income and conclude that people are stuck or simply “churning around in the bottom.”
Another concerning response was the lack of differentiation in the causes of inequality. For example, the president of the Conference Board of Canada, Daniel Muzyka, citing the IMF and others, indicated that income inequality adversely affects an economy. However, Mr. Muzyka fails to mention that inequality can emerge for a number of reasons, each of which influences the economy differently.
For example, there are too many countries where wealth is largely not earned but rather extracted by securing favours and special treatment from government. There are other countries where leaders (usually dictators) enrich themselves by appropriating state assets for their own benefit at the expense of the general population. Finally, there are countries like Canada, where by and large, wealth is achieved through hard work and entrepreneurship, which is predicated on providing goods and services demanded by citizens at a price and in a manner agreeable to them.
Treating these disparate types of income inequality as synonymous does a disservice both in terms of our understanding of inequality but also our ability to measure its effects on the economy.
The goal of our study was to illuminate the reality of how the incomes of working Canadians change over time, which we argue must be incorporated not only in the debate on inequality but also into the larger discussion and formulation of social policy. Ignoring a natural and present phenomenon in Canadian society such as mobility will lead to worse policy and outcomes for Canadians, especially those currently at the bottom of the income ladder.