Skip to main content

Education is key. For a start, governments must ensure that more of our youth finish high school with good basic skills, then get them to college or university.Kenneth C. Zirkel/Getty Images/iStockphoto

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

The coming byelection in Toronto Centre, contested by two champions of greater equality, Chrystia Freeland and Linda McQuaig, has proven a jumping off point for a new round of handwringing over the rich and poor, and the distance between them.

Toronto Centre, you see, contains Rosedale and Regent Park, meaning the rich and poor live rather close together. There's nothing new about that:  Writing a century ago, a visitor to Ottawa remarked on the Rockcliffe neighbourhood, where the well-to-do jostled uncomfortably closely with residents of less tony Vanier.

In the first half of the 20th century, income inequality was on the rise in the West. Two great wars destroyed many fortunes, and made a few others, but on balance did not do much for inequality. After the war, however, the jobs market eventually did well and, meanwhile, secondary school completion rates and postsecondary attendance soared.

That started to equalize things. Higher education became the ticket to rising incomes among men. By the 1960s, postsecondary schooling had opened wide to women too, and along with it the market for higher-skilled jobs. Their wages swelled the incomes of the average family. It was only a decade ago that women's workforce participation stopped rising.

Despite significant changes, over the past sixty years you could pretty much draw the Canadian income distribution with a ruler. The share of total income going to the bottom fifth of the population, the middle, the top -- these are all pretty much straight lines.

When it was my job to show such data to MPs, going back 25 years, there was a common response -- "What about that thing where the rich are getting richer and the poor poorer?"

The answer is, "What about it?" The share going to the top fifth did rise a bit beginning around the early 1990s, and then levelled off over the past decade. But within that top fifth, the people at the very top -- the top one in a thousand or one in ten thousand -- did rather well. The past couple of decades were good to anesthesiologists, veterinarians, and investment bankers, and that seems to have caught some attention -- some heat, and not much light.

Bigger inequality trends in the US have caught more attention. In the US, where an uncomfortable number of young men are in jail rather than school, and where the 2008 global financial shock was extremely loud and incredibly close to many Americans livelihoods, the investment bankers have done well. Really well. In Southampton, NY, the rich jostle the super-rich, and the incomes of hedge fund managers far outstrip those of lowly Fortune 500 CEOs.

That raises political tension. Not many people like to be unemployed while those around them are not, and their political representatives don't like unhappy voters, either.

And that's what inequality does. Beyond a point, it makes people unhappy. Beyond another, it makes them very unhappy. Extreme inequality brings populist ideas, even revolutions, to boil.

The trouble for economists, and for policymakers who happen to listen to them, is that there is no special number, no threshold, not even an agreed definition of the dimension of inequality that matters. In other words – there's no consensus on how much inequality is too much.

One thing, however, is clear enough: Hasty fixes to the income inequality problem tend to be bad ones. Excessively taxing the rich, or corporations, reduce measured inequality, but they also impede growth and opportunity, and leave us all worse off.

A longer-term view focuses on policies that create opportunity. Education is key. For a start, governments must ensure that more of our youth finish high school with good basic skills, then get them to college or university. Make it easy for businesses to invest, to grow, to hire, for people to move from job to job and place to place.

These things help create a merit-based society. They make it so that it matters less where you came from and more what you can actually do. These are long-term fixes and, globally, they work. Countries that pursue them have greater equality of opportunity and better growth outcomes -- and that reduces inequality of incomes.

The World Bank's research on this subject indicates that the relationship is pretty powerful. The less your education level depends on what your parents achieved, like other factors you can't control, the better your range of opportunity, and the lower is a nation's measured inequality.

If you're concerned about inequality, from a policy perspective, don't blame somebody. Focus on creating opportunity.

Finn Poschmann is vice-president of research at the C.D. Howe Institute