What growing income inequality is costing Canada’s future generations

OTTAWA — The Globe and Mail

Sicco Naets, 39, is a manager in Ottawa. He says he’s further ahead in his job than his parents were at his age. ‘But my standard of living is a lot lower than theirs was.’ (DAVE CHAN FOR THE GLOBE AND MAIL)

This is part of The Globe's Wealth Paradox series, a two-week examination into how the income divide is shaping Canada.

It’s been dubbed the Great Gatsby Curve.

Plot countries on a graph. Put income inequality on one axis, mobility between generations on the other.

A sobering picture emerges. The dream of achieving a better life than your parents is more elusive in countries where the gap between rich and poor is larger.

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For now, Canada sits comfortably in the middle of the curve among developed countries. It’s more equal and traditionally more upwardly mobile than those at the extremes of the scale, including the United States, but it trails countries such as Denmark, Norway and Sweden.

And yet a disquieting trend has taken root as Canada emerges from a decade transformed by powerful forces – some beyond our borders, others closer to home. Globalization, a digital revolution and public austerity programs are reshaping the economy. Good paying factory jobs continue to vanish, and middle-class incomes are getting squeezed. Many of the great equalizers – pensions, public health care and education – are threatened by the fiscal challenges facing governments at all levels.

That leaves a greater share of income, wealth and power in the hands of contemporary Jay Gatsbys.

The challenge for the country is to preserve for future generations all the good things that helped previous generations – especially the massive Baby Boom cohort – thrive and get ahead, argues University of Ottawa economist Miles Corak, one of Canada’s leading experts on poverty and mobility.

“We have a sense of being relatively successful in terms of mobility, but it reflects an era that was more equal,” he points out.

Today’s twenty and thirtysomethings are likely to find it much harder to get ahead than their parents did, he warns. For them, even a middle-class life is increasingly elusive.

Sicco Naets, a 39-year-old manager at an Ottawa high-tech start-up, is emblematic of many post-Baby Boomers, who worry the Canadian dream is passing them by. He and his wife earn “well above” the national average. They have two children, one car, little debt and a modest suburban town home.

And yet Mr. Naets is frustrated and angry that his generation seems to be slipping further behind. He dreams of a larger house for his growing family, but he’s fearful moving up will leave him too much debt, too little savings for retirement, or both.

“Compared to my parents, I’m way further ahead from a job point of view, I’m better educated and I’m probably in a higher income bracket. But my standard of living is a lot lower than theirs was,” he says.

Stuck in a slow-growth economy after a decade of stagnating incomes for the middle class, experts say Canada is at a crossroads. It can look to countries that have found creative ways to nurture greater equality and mobility, without sacrificing economic growth. Or it can follow the U.S., Britain and other countries down the path of increasingly isolated social extremes.

While inequality is significantly less pronounced than in the U.S., Canada is trending in the same direction as its neighbour on several key metrics, including ebbing mobility, a rising share of income in the hands of the top 1 per cent and a swelling gap between what CEOs and workers make.

The country’s business elite – the chief executives of the top 100 companies – took home 122 times what the average worker did in 2012, up from a ratio 84-to-one a decade earlier, according to research commissioned by The Globe and Mail.

The reality is that perfect equality is both unattainable and undesirable. Nowhere are wealth and income distributed completely evenly across a population. Countries are all unequal, and that’s generally a good thing. Inequality creates a powerful incentive to work, to invest and to get ahead. More income is the reward for success, which is spread to others when those at the top invest, start new businesses and hire more workers.

But it’s all a question of degree. You can have too much of a good thing.

Former prime minister Paul Martin, 75, figures he’s part of the most fortunate generation in Canadian history. He entered the work force in the booming 1960s, at the vanguard of an age group that would only know rising incomes and boundless opportunity.

But Mr. Martin frets that Canada is now drifting towards a society of extremes and a hollow middle – conditions he argues have helped spawn the anti-government Tea Party movement in the United States.

“The ability for succeeding generations to do better than preceding generations is an essential part of the glue that makes a democracy work,” says Mr. Martin, who now devotes his energy and part of his wealth to fighting for better aboriginal education. “The gutting of the middle class is more than the canary in the coal mine. It essentially opens your society and your economy to all kinds of fissures.”

The major economic transformations of the past couple of decades have certainly been a mixed blessing for the middle class. Rapid globalization and huge advances in technology have depressed wages and marginalized routine work.

They have also made life cheaper, driving down the cost of most household goods, from flat-screen TVs to clothing to furniture. Cheap money has meant people can borrow more to fuel these purchases.

The economic emergence of countries such as China has driven up demand, and prices, for Canada’s prized natural resources – fertilizer, oil, metals, canola and the like. And the benefits of the long resource boom have spread wealth across the country.

But the Great Recession ended the party, leaving the world in slow growth mode for a while.

The 1 per cent will be okay. No worries there. But the transition to sluggish growth and government austerity has left many middle-income earners feeling frustrated, financially squeezed and worried about slipping backwards.

This middle-class angst has made inequality fertile ground for politicians, right across the political spectrum, in Canada and elsewhere.

It’s lonely in the middle

Canada experienced the greatest surge in inequality in the 1980s and 1990s, based on the broadest measure – the so-called Gini coefficient, which plots how far incomes deviate from a society where everyone earns exactly the same. Since 2000, inequality has remained flat.

But other key measures of inequality suggest a less benign picture of what has happened in the past decade. While the middle class may not be sliding backward, it is shrinking. The share of Canadians with middle incomes has been in steady decline since the late 1980s. The share of the population at both the upper and lower extremes has grown.

Canada’s experience of rising inequality isn’t unique among wealthy countries. A host of global factors are at work, including technological change, a shift of manufacturing jobs to developing countries, as well as a surge in self-employment and a proliferation of performance-based incentives for top executives and professionals.

That’s meant downward pressure on the wages of the lesser skilled, and greater rewards for the highly skilled. Routine work – not just in factories but in offices – is rapidly losing value.

But the trend line suggests Canada is not only impacted by wider changes but is breaking away from the pack in pursuit of what has generally been a particularly American dream of making it “big.” Inequality grew faster in Canada from the early-1990s to 2010 than in all but one other OECD country. The concentration of income in the hands of the richest 1 per cent was 10.6 per cent in 2010, down slightly from the pre-recession peak of more than 12 per cent, but up sharply from 7.1 per cent in 1982.

The concentration of wealth is also rising. The top 20 per cent control 70 per cent of net worth.

The Conference Board of Canada gives Canada a “C” grade for inequality, ranking it 12th out of 17 peer countries. Denmark and Norway earn the highest scores. The U.S. is last with a D.

Meanwhile, the spillover effects from the success of the 1 per cent has completely bypassed many communities, including indigenous people and some new immigrant groups.

Large swaths of the country are missing out as well. There is now evidence of growing regional and postal code disparity, exacerbated by the disproportionate growth of financial services, commodities and real estate. More than half of the rising share of income that flowed to the top 1 per cent between 1982 and 2010 went to just two cities – Calgary and Toronto – according to a newly released study by economists Brian Murphy of Statistics Canada and Michael Veall of McMaster University.

The two cities are home to just 20 per cent of Canadian taxpayers. And unlike many other wealthy countries, tax policies have become less effective at reducing inequality in Canada over the past two decades, according to the OECD. That’s due to lower marginal tax rates, fewer tax credits for low-income workers and enhanced savings incentives that go mainly to higher income earners, including RRSPs and tax breaks that favour capital gains over earned income.

In the workplace, many workers have less bargaining power now than at any time in their careers, a consequence of declining unionization, persistent labour surpluses and increased foreign competition.

Health and wealth

Why should Canadians care? It isn’t just a question of fairness. It’s about the long-term health of the economy, and society.

Conservative Senator Hugh Segal argues that years of costly social programs have done little to lift up the one in 10 Canadians who live in poverty. Denying these roughly three million people the opportunity to get ahead, he says, is both “un-Canadian” and bad public policy.

“There is room at the family table for all Canadians,” he says. “Leaving people behind – when so many who live beneath the poverty line work, but do not earn enough to get out of poverty – is simply negligent public policy in a market economy, at all levels of government.”

Canadians are living in “dreamland” if they think the country can avoid rising inequality when the economy is headed into an extended period of sluggish growth and austerity, warns Ed Clark, 66, president and chief executive of the Toronto-Dominion Bank.

“Slow growth doesn’t hurt people like Ed Clark, and closing fiscal gaps doesn’t hurt people like Ed Clark,” he says. “But it sure hurts the average person. So you have all the forces building that are going to put pressure on inequality.”

A recent International Monetary Fund study debunks the conventional wisdom that less equality is a healthy byproduct of a growing economy – namely, that a rising tide lifts all boats. Instead, countries with greater equality tend to enjoy more stable growth over the long haul, according to the 2011 report by staff economists Andrew Berg and Jonathan Ostry. The authors argue that excessive inequality stifles investment, leads to more frequent boom-bust cycles and makes people wary of sound economic policies. Based on an analysis of dozens of countries, they found that reducing income inequality by just 10 per cent extends the length of economic expansions by 50 per cent.

Interestingly, the authors argue that greater inequality may make financial crises more likely as lower income-earners borrow more and save less in a race to keep up with the lifestyles of those at the top. The massive run-up in Canadians’ ratio of household debt to income in recent years suggests many families are chasing a dream they can’t afford.

Inequality is also linked to poorer health outcomes and higher rates of crime and social unrest. Even in Canada, low-income earners are less likely to have a family doctor and to seek early treatment for medical problems.

The result: poorer health for those at the bottom of the income scale – a trend that can exact a heavy economic toll through lost productivity and higher health care bills.

As the Great Gatsby curve suggests, inequality stifles upward mobility, putting the hopes of many Canadians at risk. A significant majority of Canadians – 61 per cent – now say inequality stands between them and enjoying a better life than their parents, according to recent survey by Ekos Research Associates

And yet Mr. Naets, the Ottawa tech executive, figures he’s better off than the generation of twentysomethings behind him. For them, house prices are getting out of reach, many are stuck with too much debt and they face the prospect of much higher taxes for health and social programs that may not be around when their turn comes.

“For people graduating now, how do you sell that story?” he wonders.

Barrie McKenna is a columnist and business correspondent with The Globe and Mail, based in Ottawa. Reporting also contributed by Tavia Grant in Toronto.