This is part of The Globe's Wealth Paradox series, a two-week examination into how the income divide is shaping Canada.
Income levels for most Canadians haven’t changed much in recent years, but for one group: The wealthy are pulling away from the pack.
An analysis of top earners shows their annual incomes have more than doubled over the past three decades while the median taxpayer’s income has changed very little, suggesting that in Canada – as in the United States – the wealthy have benefited most from economic growth and productivity gains.
Globalization is the crucial driver: The top 1 per cent of earners have seen growing demand for their specialized skills in the knowledge economy, while lower-income earners have felt the pressure of offshoring and technological change. But though education, field of expertise and hard work help propel people into the 1 per cent, there are signs that mobility is being somewhat compromised. There’s more stickiness at the top – once people reach the top 1 per cent, they’re more likely than in the past to stay there.
At the very top, skyrocketing executive pay in the U.S. has had ripple effects as Canada and other countries try to lure and retain talent. Highly skilled workers – from scientists to specialized engineers – are also in greater demand, particularly in cities with tighter labour markets, such as Calgary. Those with the prized skills for today’s economy are seeing above-average rewards, while demand for others is dwindling – creating a more polarized job market.
“The market for people at the top has only improved because they’ve got more scope for their skills. Meanwhile, people in the middle to the bottom end in Canada are put in a position where they are competing with workers globally,” said Michael Veall, economics professor at McMaster University, who has been studying income trends for 25 years. “One group has had a better market and one group has had a worse market for their skills.”
Other forces are also at work. Declining unionization has contributed to wage inequality, while government policy has also played a role, with cuts to transfers and lower marginal tax rates since the 1980s making Canada’s tax-and-benefit system far less of an equalizer than in past decades, according to the Organisation for Economic Co-operation and Development.
The higher up the income ladder, the larger the gains. Incomes among the top 1 per cent have climbed 80 per cent since 1986, according to inflation-adjusted calculations by Prof. Veall. They’re up 138 per cent for the top 0.1 per cent of earners and 169 per cent among the top 0.01 per cent – compared with gains of 19 per cent for the bottom 90 per cent of earners. Thus the most affluent are gaining a greater share of the income pie.
Canadians, Prof. Veall said, need to discuss “how we adjust to a fairly remarkable social change.”
Executive pay has soared since the 1990s, spurred by new regulations that require pay disclosure for top executives – leading to a competitive race to keep pace with the highest paid – and by a growing push to pay executives increasing amounts of equity compensation, such as share units, which have led to bigger payouts.
The most elite – who are skewing the average upwards – tend to be concentrated in finance and management. In the decade since 2001, median pay for CEOs at Canada’s 100 largest companies has almost tripled to $4.1-million from $1.4-million. (The pay totals are even higher, but the calculation excludes the value of stock option grants and pension accruals in both periods because there is no comparable data available from 2001, when the information did not have to be disclosed.)
“The market has grown a lot bigger, so the top sports stars, movie stars and business executives make mega bucks, because the catchment area for their appeal is huge – it’s now global, whereas 10 or 20 years ago it was more localized,” said Michael Wolfson, an economist and Canada research chair at the University of Ottawa.
Canada has long been considered more equal in income than the U.S. due to its stronger social support programs, but that’s changing with global competition and more porous borders. “It’s been a lagged adjustment in Canada. But the more egalitarian tendencies just couldn’t stand up, particularly at the high end of the income distribution, to the pressures from U.S. competition,” where CEO pay is skyrocketing, Mr. Wolfson said.
It’s not just executives and elite athletes who are seeing wages climb. To join the top 1 per cent of earners requires $201,400 in annual earnings, and the group encompasses doctors, dentists, lawyers, veterinarians, real-estate agents, architects and engineers. The knowledge economy means that these jobs are much more valued than in the past.
Engineers, for example, have seen their earnings climb 35 per cent in the past 25 years after adjusting for inflation, data from Statistics Canada show. The gains have been even greater in Alberta, where the most senior group of specialized engineers has seen median base salaries rise 18 per cent in the past five years alone, according to the Association of Professional Engineers and Geoscientists of Alberta. Their median base salaries of $218,000 a year – with total median compensation of $325,000 – puts them squarely in Canada’s top 1 per cent.