The Labyrinth of Inequality

by Terrance Hunsley

Income inequality is not simple to measure or interpret.  

People in the centre and left of the political spectrum (and some on the right as well) are clearly concerned about increasing income inequality.  The issue is a consistent focus of political debate. It is especially sensitive in Canada because of the equality rights provisions of our Charter of Rights and Freedoms.  

We have thought of it in its simplest sense as the rich getting richer and the poor getting, at least relatively, poorer. There is also a common feeling that the “middle class is being hollowed out,” with a professional class moving upward and production workers moving downward.

The economist Thomas Piketty gained best seller status by tracing how the conspicuous wealth and elitism of the 1920’s were followed by forty years or so of decreasing inequality and rise of worker power, and then a reversal to a forty year period of growing wealth and inequality. 

But trying to show that with numbers is tricky. An Economist article of a year ago (Inequality Illusions, Nov 2019 ) pointed out a number of grey areas. For example, it makes a big difference whether you measure people’s incomes before or after taxes and transfers (government benefits). 

Several countries, including Canada, have tried to offset inequality through progressive income taxes and redistribution through tax benefits like the HST credit and Canada Children’s Benefit, which have significantly helped low and middle income families.  

Before-tax income statistics (also called gross incomes or market incomes)  show gradual but consistent divergence between the mid-seventies and 2005. According to the Centre for the Study of Living Standards (CSLS), the median wage basically stagnated, gaining no value, while the productivity of the labour force increased by about a third. People in the top third of the scale saw increases while the bottom third, basically minimum wage workers, saw their wages fall behind inflation.  In 1975, the average (provincial) minimum wage was almost 50% of the average wage. By 2005, it had fallen to about 40%, according to Statistics Canada. 

By about 2010 there was a small uptick in low end wages as the baby boom retires and provides some opportunities for younger workers. But the uptick is small, since most workers today really have no bargaining power, and production is easily moved to low wage countries. Technology is also permitting many service industries to be outsourced, globalized or automated. The new economy jobs that require specialized skills pay well. But general purpose service jobs like retail and personal health service, pay very little. 

At the other end, corporate managers, professional performers and elite athletes become multimillionaires. Professions like law, medicine and others protected by government regulations, are able to restrict entry into the profession and internal competition,  and thereby stay ahead of the pack. 

The picture becomes less clear when we move from individual wages to measuring family or household incomes. When women started flooding into the labour market in the 1970’s, we changed quickly to two earner families, and saw a boost in family and household incomes.  For some time, this appeared to be a process which would help to reduce income inequalities. Before long however, the mating process became what some analysts called “assortative” –  meaning that people soon began to find their mates within socioeconomic categories similar to their own, so inequalities remained. However, The Economist makes the valid point that the size of the average household was shrinking as the divorce rate shot upwards, so that the reported income was supporting fewer people. They concluded that while wages may have stagnated for the bottom half of the distribution, there was still a substantial increase in living standards achieved by the combined incomes and fewer children. 

Another trend which affected inequality was the ageing of the population. Retirement incomes are much more equal than younger age ranges, and thereby worked, in part, toward reducing inequality. At the same time, the accumulation of income and wealth among older people also served to increase the gap between older and younger generations. It is hard to determine the impact of this since a great deal of wealth is now being passed down to younger generations. The article also points out that substantial levels of wealth have accrued to middle and upper income families through the housing market, which has shown rapid increases in value. In fact, many families invest heavily in housing as a way to build equity for their retirement years. On the other hand, high prices in growing cities are becoming a barrier for middle income families, and low wage workers have few options.

Most analysts agree that wealth is more unequally distributed than is income. Yet The Economist, as well as many of the more conservative think tanks, tend to be pessimistic about the effectiveness and cost efficiency of taxing wealth. They point to difficulties in assessing non-financial wealth, as well as the ability of the wealthy to move their wealth around and avoid taxes. They point out that several countries which once had wealth taxes have given up on them. (……hmmm 🙂

The Economist also makes the point that globalization has resulted in cheaper consumer goods, such that lower income people can buy things now that they couldn’t buy a couple of generations ago. This is obviously true in some instances. My son recently bought a small TV for his cottage, and paid about $110 for it at Best Buy. In 1970, I bought what might be considered a roughly equivalent TV for about $500. That was a month’s pay for a newly graduated professional. $110 is a day’s pay for a minimum wage worker. ($500 in 1970 equals about $3400 in 2020 dollars.) Of course that same benefit does not appear if you need to rent or buy housing, hire a lawyer, or pay for insurance.  

Another dimension of inequality came to the fore with COVID. Most professionals were able to shift their work to their homes and enjoy the time and money saved from commuting. But frontline workers were forced in many instances to continue going to work because they had no paid sick leave, and they had to cobble two or more part time jobs together to make ends meet.  They were more likely to contract the disease and to bring it home to their families. They were stressed to look after their kids while the higher paid couples working from home could manage, albeit with difficulty.  Women and minorities were more likely to lose their jobs.  Inequality took on a new look, which was hard to ignore or wash over with statistics. Governments introduced special measures to help maintain incomes and support businesses. Even though some businesses made immense profits because of the pandemic (Amazon, Facebook, tech companies, etc) the liability for workers’ security was clearly seen to be government, not business. 

So while income inequality is a complex issue, it persists, and it shows up in many ways. Even health and mortality rates reflect differences in living standards.  Systemic discrimination works against economic opportunities for minorities. And when we look at the distribution of pay and benefits and economic security in the labour market, the inequities are clear.   Contrary to what some people may think, the rewards of the labour market do not reflect the effort, work hours, education, skills, or creativity of the workers. There is ample research showing that those attributes are much more evenly distributed than the money and benefits. We have a two-tier economy with huge profits accruing to companies who pay slave wages.

People in several countries place the blame for this on a globalized capitalist economy. But I believe, (and I think The Economist would agree), that the blame lies with weak and ineffective governments. It is the responsibility of government to ensure a fair distribution of income, education, health care, access to government and democracy. When regulations are open to manipulation, when politicians and senior public officials are beholden to corporate interests, when the regulated control the regulators, when global business can ignore national taxes, when banks can engage in illegal activities and simply negotiate fines when caught –  when these things are permitted by weak governments, inequalities will continue to grow and show themselves in other ways. When governments will not require a decent living wage for all workers, there is simply something wrong with governments.

And despite The  Economist’s cautions about increasing taxes on high income and wealthy people, strong governments have been able to successfully do so in the past.  Starting with Roosevelt’s New Deal in the 1930’s and similar developments in other countries including Canada in the years to follow, the trends in inequality were reversed.  Marginal income tax rates were much higher than today’s. A supportive environment for workers, and an expanding net of redistribution and social supports helped to accomplish the objectives of making the economy more fair and accessible, and to reduce inequality. And here’s a key –  during this period of strong government, high taxes, worker power – from the forties to the mid-seventies, despite warnings that rich people would stop working and investing – despite the conventional wisdom that one finds in The Economist, our economy enjoyed low unemployment and economic growth that was about twice what it has been since the tide changed in the 1970’s. 

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