Income inequality steady by one measure, absolute gains tell another story

Income inequality in Canada has remained steady since 1998 according to the traditional benchmark, but absolute dollar gains by the country’s highest earners have far outstripped the gains by those at the bottom, a report by TD Bank said Tuesday.

Even though the poorest saw a slightly larger percentage gain in income, absolute gains — the amount of dollars in a person’s pocket — tell a different story, said TD Bank chief economist Craig Alexander.

“Although the traditional benchmark of income inequality isn’t showing an increase, the absolute levels of income matter enormously,” he said.

After a 20 per cent increase, the after-inflation level of income of those in the bottom 20 per cent increased to only $15,200 in 2010 from $12,700 in 1998.

Meanwhile, at the high end of the income scale, the top 20 per cent have seen an 18 per cent increase in income since 1998, but that translates into $26,700 to bring their income to $171,900.

“So part of the issue around income inequality is the fact that households at the low end of the income scale have extremely absolute low levels of income and that’s a major challenge,” Alexander said.

And he points out, those in the middle of the range have seen the slowest pace of increases as the downward pressure on jobs and wages in the manufacturing sector has weighed on growth.

Alexander said within the middle group there was likely a range of experiences depending on what sector individuals worked.

“The recession has concentrated in the manufacturing sector. We lost a lot of manufacturing jobs and a lot of those manufacturing jobs would have been in the middle income category,” he said.

“However we also had a lot of public employment growth in public administration, education and in health care which are good paying high-quality jobs and I think in those areas we probably had significant gains in middle income.”

The report says the gap between rich and poor increased in the 1990s as governments worked to balance their budgets, but since then has held steady. The results compared with growing income inequality in the U.S. which has seen its middle class eroded over the last two decades.

The financial crisis in the U.S. pushed the median household income south of the border to a 16-year low, while in Canada, the relative economic strength, has helped push the country past our neighbour.

A report last year by the Organization for Economic Co-operation and Development urged governments to do more to address the gap between rich and poor in Canada by fostering more and better jobs and even considering raising taxes.

The OECD found the main driver behind rising income gaps has been that high-skilled workers have benefited more from technological progress than the low-skilled.

Income inequality is measured by economists using the Gini coefficient. A score of zero means perfect equality, while a score of one means a country’s entire national income is earned by just one person.

However, Alexander said the coefficient misses some key things as it measures income instead of wealth and may not fully reflect the growth in income by the very richest of Canadians as it is based on survey-based income data.

“Income inequality according to the traditional economic benchmark does not show an increasing problem in Canada, but that doesn’t say that there isn’t a problem. It just says the problem has actually deteriorated,” he said.

“What we need to do is make sure kids from low-income backgrounds have the same opportunities as kids from high-income backgrounds.”

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