Eugene Lang

Summary: Reducing Income Disparities and Polarization

January 20, 2012
Chateau Laurier, January 19, 2012

View/Download the PDF: Event summary – Income disparities.

Introduction

On January 19, 2012, Canada 2020: Canada’s Progressive Centre hosted a panel discussion on income inequality. This panel was the first in a five part series of discussions based on The Canada We Want in 2020: Towards a Strategic Policy Roadmap for the Federal Government, a collection of policy essays Canada 2020 published in the fall of 2011, which focuses on five core areas that require strategic federal public policy action.

The income inequality discussion featured six speakers:

Mark CameronDirector, Global Public Policy, Research in Motion
Chrystia FreelandGlobal Digital Editor-at-large, Reuters
Alessandro GoglioEconomic Counselor, OECD, Employment Labour and Social Affairs
Keith NeumanExecutive Director, The Environics Institute
Andrew SharpeExecutive Director, Centre for the Study of Living Standards
Sherri TorjmanVice President, Caledon Institute of Social Policy

The OECD Picture

We began the discussion with an overview presentation of the OECD’s recently released report on income inequality across OECD countries, Divided We Stand: Why Inequality Keeps Rising, as presented by one of the report’s authors, Alessandro Goglio.

Dr. Goglio pointed out that income inequality, as measured by the gini coefficient, is at a record high in the OECD area. The trend toward rising income inequality first started in the late 1970s and early 1980s in some English-speaking countries, but spread throughout the OECD beginning in the 1990s, and since the 2000s has even afflicted traditionally low income inequality countries. Income inequality in the OECD area increased during both economic booms and recessions.

In Canada, the OECD found that the ratio of lowest to richest population quintiles is 10:1 today, which is higher than the OECD average of 9:1. The rise of income inequality in Canada occurred mostly in the 1990s.

The OECD has identified changes in wages and salaries as the main cause of income inequality. There are a number of drivers for this:

  • Changes in working conditions, with more part-time work, self-employed and non-standard labour contracts, and an increasing divide in hours worked between high and low-wage workers;
  • Changes in technology with the benefits of technical progress going largely to the high-skilled;
  • Regulatory reforms aimed at promoting growth and productivity, which increased both employment and income inequality.

Contrary to conventional wisdom, the OECD found that economic globalization had little impact on wage inequality trends. The effect of family formation was also not particularly important, with the increase in men’s earnings disparities being the main driver of inequality.

Not surprisingly, the OECD found that re-distribution through taxes and benefits play an important role in mitigating income inequality within all OECD countries. However, the OECD claims that tax and benefits systems have become less effective over the past twenty years in mitigating market income inequality. Canada stands out in this respect. According to the OECD, in Canada transfers became less progressive since the 1990s, and government spending shifted to inactive benefits, leading to reduced labour market activity rates and higher market-income inequality. This period corresponds with the fiscal consolidation and austerity agenda that both the federal and provincial governments embarked on at that time.

The OECD identified a number of basic policy lessons countries need to consider to respond to rising income inequality. While social transfers can play a big role in offsetting inequality, they need to be targeted. Tax provisions should be reviewed on top-income households to ensure the tax system is progressive and fair. Governments need to work harder to facilitate the employment of under-represented groups. An emphasis on the up-skilling of the workforce is required. In the final analysis, the OECD concludes that governments must have an appropriate mix of both redistributive and inclusive employment policies.

The U.S. Picture

Chrystia Freeland provided a snap-shot of the politics of income inequality, and the increasing salience of the issue, in the United States today. According to Ms. Freeland, the American public has woken up to income inequality as an issue in the last two years, and this represents a big change in American society. A recent Pew Institute poll identifies income inequality as the most divisive social issue in the United States today. This has manifested in the Republican race for the presidential nomination—the personal wealth of one candidate, Mitt Romney, has become a central issue in the campaign. What was once a taboo subject in the U.S. is now front page news and centre stage even on the right wing of American politics.

In Ms. Freeland’s view income inequality has jumped to the fore because, even though it has been a creeping problem for decades, it was masked by the credit explosion over the past decade, which facilitated mass consumption, and created the illusion of people feeling richer than they were because most Americans had access to cheap credit. With the credit collapse three years ago, the middle class has reached a tipping point, and is now feeling the brunt of three decades of rising income inequality and stagnant wages, in Ms. Freeland’s view. The top 1% of earners is not reacting well to this political and social shift.

Ms. Freeland identifies two big issues that are colliding with one another in the U.S.—the newfound awareness of income inequality and the expression of discontent with it among the middle class, coming into contact with a lack of faith in the ability of government to do anything well in America. The remedies to rising inequality that the OECD identifies might, therefore, be beyond the reach of US politics today.

The Canadian Picture: Public Opinion

Keith Neuman presented recent Environics Institute public opinion research on the salience of the income inequality issue in Canada. According to these findings, Canadians have recognized the gap between rich and poor has been getting bigger for years. Today 64% of Canadians feel the gap between the wealthy and the rest is historically large. Most people attribute the gap to tax breaks for the rich, other government policies, and the dynamics of capitalism itself.

Environics concludes that Canadians believe the inequality gap is greater in the US than in Canada (which is correct), but that the gap in Canada is about the same as in Europe (which is not correct). Fully 82% of Canadians think governments should actively try to reduce the income inequality gap in Canada. That said, Environics concludes that income inequality is not the burning issue in Canada it seems to be in the U.S.(1) Fifty eight percent of Canadians are satisfied with the direction of the country, Canadians are generally accepting of large corporate profits, satisfaction with standards of living are holding steady among most Canadians and 47% of Canadians think their personal finances will improve in 2012, according to Environics.

(1): Recent research by Ekos suggests income inequality is in fact rapidly rising to the top tier of issue concerns among Canadians.

——————–

Following these three context setting presentations, we hosted a panel discussion with the three previous presenters and three of the authors who contributed to The Canada We Want in 2020: A Strategic Policy Roadmap for the Federal Government. The panel was moderated by Don Newman, Chairman of Canada 2020’s Advisory Council.

The Canadian Picture: Public Policy

Mark Cameron began the panel discussion by arguing that income polarization between the “super rich” and the middle class is the emerging problem in Canada. In his view, however, this is the result of global trends and there is little that governments can do about it. The one area where governments can intervene effectively, in Mr. Cameron’s view, is CEO compensation.

Andrew Sharpe responded by claiming that Canada is at record levels of wealth and income inequality and that this is linked to declining bargaining power of workers as a result of the de-unionization of the work-force.

Sherri Torjman argued that rising poverty and income polarization are serious problems in Canada and that we need “linked strategies” to deal with them, not just conventional income redistribution methods. These strategies should include investments in social infrastructure like public schools. For Ms. Torjman, certain groups, notably First Nations, are a particularly acute problem. She also suggested many employers are not providing their employees with living wages.

Chrystia Freeland cited Nobel Prize winning economist Michael Spence, who argues, contrary to the OECD conclusions, that globalization is a central cause of income polarization. Mr. Spence claims that alleged technology causes of income polarization might in fact really be globalization effects. In any event, policy might not matter much in Ms. Freeland’s view because technology and globalization are working in tandem on the middle class and are relatively unresponsive to public policy.

Alessandro Goglio conceded that globalization and technical change do go hand in hand and it can be difficult to distinguish between the two forces, which are in many respects derivative of one another.

Keith Neuman claimed that from a public opinion standpoint, Canadians do not see globalization as a key driver of income inequality.

Andrew Sharpe argued that education is increasingly important in dealing with the income inequality challenge. The relative and absolute lack of education among certain groups in Canada, notably Aboriginals, is a serious concern requiring more concerted policy action. Sherri Torjman echoed some of the OECD findings, by stating that Canadian governments have let programs languish that served to mitigate income inequality. In her view, governments have been investing scarce resources in non-targeted, non-progressive programs that benefit higher income Canadians.

Mark Cameron pointed out that while conservative-minded people like him see a more limited government re-distributive role in dealing with income inequality, governments nonetheless need to pay attention to the issue because it can undermine social cohesion.

Finally, Dr. Goglio claimed that across the OECD millions of people perceive that they are falling behind. This is an extremely difficult challenge to meet in today’s environment of fiscal consolidation and austerity in most advanced countries. In Dr. Goglio’s view, this large and growing group of people need to be reassured by governments that they are doing something to alleviate the trend toward greater income inequality. In particular, Dr. Goglio argued that youth and gender policies are needed, as well as an inclusion agenda. There is, in his view, a huge scope for enlightened public policy in the area of income inequality.

Conclusion

Nearly a year ago, Canada 2020 identified rising levels of income inequality as an unsustainable phenomenon that required strategic federal public policy action. As a result, we commissioned three prescriptive papers on this subject for our publication The Canada We Want in 2020: A Strategic Policy Roadmap for the Federal Government. Since then, new research in Canada and abroad has confirmed that the decade’s long trend toward greater income inequality not only persists, but is getting worse in most developed countries, including Canada. The recent recession and financial crisis have merely served to highlight a problem that has been growing for many years. The Occupy movement was a new and important public expression of dissatisfaction with the status quo.

Both our publication and this panel discussion also confirmed that income inequality is one of the major structural issues facing Canada, requiring federal public policy action. In fact, income inequality in Canada is significantly higher than in most OECD countries and some studies suggest it is growing faster in Canada today than in the US. While our authors and panelists differed on the sources of and responses to income inequality, all basically agree on the scope and scale of the issue.

Over the next year Canada 2020 will continue to focus on income inequality as one of our core areas of policy research and dialogue. We encourage Canadians to contribute thoughts and policy ideas to this discussion on our website, canada2020backup.see-design.com. Later this year we will publish a second volume, informed by public events like this and the input of Canadians, containing policy recommendations on income inequality and the other four issue areas we have identified in The Canada We Want in 2020.

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  1. It is not just a question of redistribution that has to be addressed. The effect on the functioning of the economy as a whole is closely related to the way that the stock (savings) and flow (income)of wealth is distributed in the economy. The interest rate and ability to use that rate depends on the distribution of income. All policy reshapes the distribution but not necessarily in a beneficial fashion. There has to be the proper balance in order to get the best performance from the economy and there is a very wide range of possibilities for tweeking the economy’s performance.

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