For a growing number of citizens in many Western countries, rising income inequality and declining personal expectations appear to be part and parcel of the new global reality. Yet while income inequality has been on the rise for three decades, its ascent to political prominence is much more recent. The global financial crisis and recession have brought the issue of income inequality out of the realm of research institutes and into public discourse and voting booths.
That income inequality has been rising, for some time, and across most of the Organization for Economic Co-operation and Development countries, is not news. But neither is it well understood. As conventionally measured (by the Gini coefficient), income inequality has increased since the 1980s in 18 of the 21 OECD countries for which trend data are available. In Canada, income inequality so measured rose in line with the average deterioration among OECD countries of almost 10 per cent, but most of the Canadian increase occurred in the 1990s – not in the 2000s, as is commonly supposed.
Behind these similarities, however, lie some significant differences. Canada has much lower income inequality after transfers and taxes than the United States, and you might be tempted to attribute this to much greater Canadian redistribution – but you would be wrong. In fact, the reduction in inequality due to Canada’s progressive transfer and tax system (28 per cent) is only slightly greater than that of the United States (24 per cent). The main factor is much lower inequality of “market incomes” in Canada – indeed, lower than all other G7 countries, including Germany and France.
Looking at inequality measured as either the “1 per cent versus the rest” or the “top 10 per cent versus the bottom 10 per cent” also shows sharp Canada-U.S. differences.
In 2010, the top 1 per cent in Canada took in 10.6 per cent of national income – well up from their 7-per-cent share in the early 1980s but down from their peak before the recession. But while the U.S. top 1 per cent accounted for a roughly similar share as their Canadian counterparts in the early 1980s, that share had more than doubled to 17 per cent in 2010 – and that’s up, not down, since the recession.
The Canadian and American stories are also different in the evolution of the ratio between disposable incomes of the top and bottom 10 per cent. The 2010 ratio for the U.S. was 15.9 – that is, the average income of someone in the top 10 per cent was 15.9 times greater than the average income of someone in the bottom 10 per cent of the income distribution. This was appreciably higher than in 2000. The Canadian ratio rose in the late 1990s, but today, at 8.9, is below its 2000 levels, and barely half the U.S. figure.
How has the past decade’s real economic growth translated in real income gains for the median worker across OECD countries? Not well in a number of countries, most notably the United States (where cumulative real output was up almost 20 per cent but median real incomes were actually down by about 4 per cent) and Japan (which posted even larger median income declines). For Canada, Australia and the Nordic countries, this “distribution wedge” was negligible.
So what have we learned? OECD research across many countries points to a number of factors: Regulatory reforms to increase competition have increased employment rates, bringing more low-skilled workers into paid employment, but they have also widened the distribution of wages in these now less-regulated labour markets. Part-time work arrangements have offered more flexible employment options but also increased wage dispersion. The reduction in the generosity of benefit systems, often as part of restoring fiscal balance, has had an impact. Pervasive globalization, according to Nobel Prize-winner Michael Spence, has contributed to the hollowing-out of manufacturing in the context of low-wage, huge-scale competition from emerging economies and inflexibility and poor innovation responses in advanced economies.
But what emerges most strongly and clearly from the OECD analysis is the impact of technological change in driving income inequality. Just as technological change has increased demand and market incomes for workers with higher skill levels, it has reduced the demand for workers with low skills, and only then at lower wages.
A strong public education system, managed for outcomes, rewarding excellence and willing to innovate, is essential in a world where the pace of technological change is relentless. The Internet 4.0 will transform again how we work, where we work and what we produce at work, and yet we are barely embarking on Public Education 2.0.
Canada, which has done relatively well in terms of income equality in rapidly changing circumstances, has no grounds for complacency. Our risk is a bifurcating labour market with (on the one hand) high-skilled jobs, producing high-value-added goods and services at good wages and (on the other hand) less-skilled jobs producing standardized, low-value-added products at middling wages. We need a public education system that educates the students of today for the work force of tomorrow.
But change is needed in more than education if Canadian workers are to prosper in the decades ahead. Skilled workers need skilled jobs. This will require more entrepreneurship to create the growing and striving firms that create these jobs. It will also demand more innovation so that we are continually moving up the value-added curve in every sector. And it will mean tapping into new markets in emerging economies with rapidly growing middle classes.
In this profoundly changing global economy, innovation and talent are essential for competitive economies that want to maintain high standards of living. In short, we need to win “the race between education and technology.”
Kevin Lynch is vice-chair and Karen Miske is senior adviser at BMO Financial Group.