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Lack of education leads to inequality and poverty in united states and canada

As part of this project, twenty-seven leading economists and experts in the field examine income inequality trends in Canada, the factors contributing to its marked increase since the early 1980s, and the role of policy in addressing the problem. At about the same time, Lars Osberg 1981in his seminal book on inequality, also noted the lack of movement in inequality in Canada since the Second World War. Within a few short years, however, the topic became anything but boring and a lot less predictable: Along with it grew a voluminous literature on the causes and consequences of inequality.

Income inequality has been rising over the years in the vast majority of OECD countries. Addressing these trends has moved to the top of the policy agenda in many countries.

This is partly due to worries that a persistently unbalanced sharing of the growth dividend will result in social resentment, fuelling populist and protectionist sentiments and leading to political instability…Another reason for the growing -interest in inequality is the concern that cumulatively large and sometimes rapid increases in income disparity might have an effect on economic growth and on the pace of exit from the current recession.

OECD 2015a, 60 Meanwhile, in Canada, the discussion about inequality has been polarized and, at times, confusing.

  • First, there might still be high and persistent levels of poverty among more vulnerable segments of the population, a point to which we return below;
  • Poverty thus has a female face;
  • Earnings include annual wages and salaries and income from self-employment;
  • Mobility across the income distribution Our discussion so far has focused on trends over time in aggregate measures of inequality and changes in income shares for different segments of the distribution;
  • In other words, the income of this small group one taxfiler out of a thousand went from 20 times average income to 50 times average income over this period;
  • If this correlation arises simply because lower-income families cannot afford to send their children to university, then policies such as reducing tuition, opening more subsidized seats in universities and increasing the scope of Registered Education Savings Plans RESPs should increase rates of university attendance among children of lower-income families and reduce inequality, at least among the young.

From across the border, we hear the growing chorus of concern about rising inequality from our US cousins. Some of the debate on this side of the border has relied on US facts and arguments to imply that it is.

  1. If so, what would such a link imply for poverty policy? Causal attributions and the significance of self-efficacy in predicting solutions to poverty.
  2. The key implications for our purposes are twofold.
  3. They build video games, supervised by her web developer dad. The magnitude of the immigrant inflow is large enough that it could affect the incidence of poverty and income inequality at the national level, as well as in regions and cities that receive substantial numbers of immigrants.
  4. Who are the poor? For example, over the period, the average wage in these three provinces grew by 22 to 25 percentage points more than in Ontario.

The truth, as we will see, is more complicated. As Fortin et al. It also has an important regional dimension that is masked by the usual national indicators.

Income Inequality in Canada

As Keith Banting and John Myles point out in their contribution to this volume, the complex pattern of inequality growth in Canada has led to conflicting interpretations of what is happening and even whether a problem really exists. And there is no clear winner so far.

This malaise or ambivalence was evident in the 2015 federal election. There are probably many reasons for this, but it is no doubt fair to say that it partly reflects a general lack of consensus regarding whether income inequality really is a problem in Canada and, if so, whether it can be mitigated. In our view, this is an unsatisfactory state of affairs.

As Canada begins to feel the economic effects of population aging and pursues efforts to engage more broadly in the global economy through trade, foreign investment and immigration, many of its labour market, education, skills development and tax-and-transfer policies need to be revisited.

Determining which new policy approaches or directions are best suited to counteract inequality trends while promoting economic growth requires a deeper understanding of these complex dynamics.

Starting from that perspective, we set out to conduct a comprehensive and in-depth examination of the Canadian experience relating to income inequality.

In this chapter, we draw together the research presented in the book to address three questions of central interest. First, has inequality increased in -Canada? Although the question is bluntly phrased, the answer, as we will see, is in many ways nuanced.

Economic Inequality

Second, what policy tools are available to affect inequality and how have they performed? Third, what should Canada do about inequality going forward? In answering these questions, we will try to convey some of the complexity and key insights to be derived from the evidence, but for a fuller analysis, we direct the reader to the relevant chapters elsewhere in the book.

Many Canadians are aware that their society has become less equal over the past 30 to 40 years, and that the incomes of those at the very top of the income distribution have risen much more than the incomes of others. Media attention given to these opposing narratives might have contributed to confusion and some uncertainty about the extent to which inequality is growing and whether rising inequality is really a serious problem.

One objective of this volume is thus to provide a comprehensive picture of the Canadian experience, including important new evidence on a number of dimensions not previously explored. Our focus is on income inequality, in part because that has been the main object of the public and policy discussion about inequality.

In addition, in -contrast to measures of wealth, a variety of measures of income are available on a regular and timely basis. But the principal reason for focusing on income inequality is that income — especially labour market income — is the key contributor to the well-being of Canadian families. Although several chapters focus on labour market earnings and show that these are the primary locus of the rise in inequality over the past three to four decades, we start with family income, which more fully captures changes in the economic well-being of Canadians.

A tale of two schools: The correlation between income and education in Toronto

The story about inequality in Canada is potentially confusing, in part because of the way inequality has changed over time. This is effectively summarized in figure 1, which plots the Gini coefficient,2 a commonly used measure of income inequality, for market income income before taxes from all sources other than government transferstotal income income before taxes from all sources, including government transfers and after-tax income total income after taxes and transfers over the period from 1976 to 2011.

To take account of differences in family size, the figure presents adult-equivalent-adjusted family income, which incorporates an adjustment for the fact that it costs less than twice as much to feed and house two people living together as it does for each individually.

First, inequality in family market income increased substantially over the 35-year period, with the Gini coefficient rising from 0. Second, the trend was not steadily upward. In particular, sharp increases in market income inequality occurred during the recessions of the early 1980s and early 1990s, the two most severe Canadian recessions of the postwar period.

Third, although market income inequality declined during the recovery and boom of the 1980s from 1983 to 1989inequality continued to rise during the latter half of the 1990s, a period of strong economic growth. Figure 1 also plots the Gini coefficient of adjusted after-tax family income. The difference between this line and the market income inequality line shows how much the tax-and-transfer system reduces inequality in real family incomes. This reduction is substantial: Also noteworthy is the changing role of the tax-and-transfer system in offsetting increases in market income inequality.

  1. Less surprisingly, Lemieux and Riddell also find that an overwhelming majority close to 80 percent of top-income earners are men ages 35 to 64, and that they tend to work substantially longer hours and to be more highly educated than other earners.
  2. Apart from temporary setbacks associated with recessions, the share of income received by those at the top of the distribution has increased steadily over time.
  3. Some of the debate on this side of the border has relied on US facts and arguments to imply that it is. In theory, Naomi and Shafza would have equal opportunities to do well in school, participate in extracurriculars and move on to university or college.

Between the mid-1970s and the mid-1990s, after-tax income inequality did not increase, despite a significant rise in market income inequality and two major recessions. Since the mid-1990s, however, the redistributive impact of taxes and transfers has fallen substantially and, as a consequence, after-tax family income inequality increased even more rapidly than market income inequality for a period of several years.

This pattern of changes in the tax-and-transfer system — exacerbating, rather than offsetting, inequality — was especially evident in the latter half of the 1990s.

The net outcome is an increase in after-tax income inequality of about 10 percent since 1980. We can obtain an alternative perspective on inequality trends by examining inequality in consumption, rather than income. A forthcoming article in the Canadian Journal of Economics by Sam Norris and Krishna Pendakur, summarized in this volume,4 provides new evidence on consumption inequality in Canada.

As they argue, consumption is a good proxy for lifetime income, which is not as subject as annual income to the effects of life-cycle transitions from school to work and then to retirement and short-term fluctuations in financial circumstances. Unfortunately, data on consumption are not available to the same extent as those on income, and consumption surveys have much smaller sample sizes, making them less reliable.

As expected, given our prediction of greater volatility in annual income, they show that inequality in consumption with a Gini coefficient of 0. Unfortunately, changes in survey data-processing procedures complicate comparisons of data before and after 2006. Nonetheless, the authors show that the Gini coefficient for consumption rose by almost 10 percent, from 0. After 2007, in comparison, consumption inequality changed very little, matching the relative stability of income inequality over the same period.

Thus, consumption inequality patterns support our overall conclusion from income data: Canada is not alone in experiencing rising wage and income inequality.

Income inequality in Lack of education leads to inequality and poverty in united states and canada exceeded that in most European countries, including France, Germany, Denmark, Sweden, Norway and Finland where the Gini coefficient ranged from 0. Over the 1985-2008 period, inequality rose in most OECD countries, including in low-inequality countries such as Sweden and Finland, and again the increase in Canada was about average see Heisz, figure 2. According to the OECD, several European countries have experienced further increases in inequality in the aftermath of the global -economic crisis, as have high-inequality countries such as Mexico and the United States, where the Gini coefficient now exceeds 0.

In contrast, Canada saw a slight decline in inequality from 0. The fact that income inequality has increased in many developed countries over a similar period suggests common underlying causes.

Although disagreement remains about the relative importance of the contributing factors, a large research literature has investigated the causes. The driving force that has received the most emphasis is technological change, especially advances in information and computer technologies. The core idea is that these new technologies complement skills, in terms of both education and competence in performing cognitive tasks. That is, the new technologies enhance the lack of education leads to inequality and poverty in united states and canada and with it, the wages of skilled workers while replacing workers who perform routine tasks that computers can do easily, resulting in lower wages and employment for those workers see, for example, Autor, Levy and Murnane 2003.

We review the evidence on these technological change effects in the Canadian context later in this chapter. A related driving force is the globalization of economic activity. The consequences might be higher earnings for those at the top of the income distribution — associated with the increased global reach of multinational corporations — and downward pressure on the wages of those in the middle and at the bottom of the distribution.

Although all industrialized countries are influenced to varying degrees by these underlying factors, Heisz notes that there is still considerable variation in both the level of inequality and the extent to which inequality has increased among OECD countries. This is where the third set of driving forces is most relevant.

Institutional factors such as the regulatory environment, minimum wages and unionization can play an important role in affecting the level of inequality in a country, as well as the extent to which inequality increases in response to technological change and globalization.

Several chapters in this volume examine the contribution of institutional factors in the Canadian setting, and we return to these issues later in this chapter.

Just as there is noteworthy variation in inequality among countries, there are also differences among regions within a country. In Canada, after-tax family income inequality varies significantly by province.

For instance, during the 2007-11 period, the Gini coefficient ranged from 0. And although inequality has risen in all provinces since the mid-1980s, the largest increases occurred in Ontario, British Columbia and Alberta, with negligible changes observed in Prince Edward Island and Saskatchewan see Heisz, figure 3.

Looking at these overall inequality patterns, some analysts emphasize the relative stability in the level of inequality over the past decade to argue that inequality is not a pressing problem.

According to this argument, inequality might be greater than it used to be, but it appears to have stabilized in recent years. Moreover, focusing on after-tax income inequality — the disposable income that people actually have to spend — rather than on market income inequality implies much smaller increases in inequality over time.

It estimates that the 2-point increase in the Gini coefficient of inequality across 19 countries between 1985 and 2005 served to undercut cumulative growth by 4.

An Introduction to the State of Poverty in Canada

To put this in perspective, Canada experienced close to a 3-point increase in the Gini coefficient over the same period. Some researchers argue that greater inequality affects long-term growth through its impacts, both positive and negative, on incentives to invest — in particular, by causing low-income individuals to underinvest in their skills and education — as well as through its dampening effects on domestic demand and the adoption of advanced technologies.

Stiglitz 2012 argues that higher inequality can harm efficiency by reducing work effort among people at the bottom of the income distribution, who come to view their society as less fair — a belief that can also harm the fundamental functioning of our democracy.

To the extent that these arguments are true, we have reason to be concerned about the higher level of inequality today than 30 years ago, even if inequality has stabilized over the past decade.

Context and Rationale

There is also reason to be concerned about the more substantial rise in market income inequality, even if partly mitigated by taxes and transfers. Many people form their notion of the fairness of society and self-respect based on their role relative to that of others in the productive system.

Accordingly, a more unequal distribution of rewards in the labour market can challenge this notion of fairness and be detrimental to both the self-respect of those at the bottom of the pay scale and the respect they get from others, despite subsequent income redistribution through taxes and transfers. That said, the decline in the effectiveness of the tax-and-transfer system in offsetting market income inequality is also problematic. To these concerns we add another that arises from the main reason for the relatively stable level of inequality in Canada in the 2000s.

In several of the chapters, the evidence points to the resource boom as having played an important role in that stability. In particular, the oil boom in Alberta raised the wages of low-skilled workers in that province, even in industries and occupations not directly related to the resource sector see the chapters by Nicole Fortin and Thomas Lemieux and by Joseph Marchand.

In contrast, in Ontario, those at the bottom end of the earnings distribution did not experience wage increases in the 2000s, and overall inequality in that province increased. As the resource boom ends, however, we could very well see a ratcheting up of market income inequality for the country as whole in the coming years. A closer look Digging below summary measures of inequality such as the Gini coefficient leads us to a more nuanced view of changes in the income distribution.

Figure 2 plots the growth of market income — that is, all income except transfers and capital gains — of various segments of the income distribution between 1982 and 2010. The real market income of Canadian taxfilers rose on average by 13.