A Quarter Century of Economic Inequality in Canada: 1981 - 2006

1. A Quarter Century of Economic Inequality in Canada: 1981 - 2006 Lars Osberg Economics Department Dalhousie University Acadia University, November 20, 2008

2. What has been happening to Economic Inequality in Canada in recent years? • 1980: “economic inequality has remained roughly constant since the Second World War” • (Osberg, 1981:205) • Surprising – given massive changes in Canadian economy 1946-1979 • Increased Inequality 1981-2006 • middle 90%: ‘new normal’ = nil growth real income • pulling away of top percentiles - @ increasing rate • cutbacks – a nastier reality at bottom • 1995 – watershed year in tax/transfer system • Are these trends sustainable?

3. 54 years of quintile shares

4. Unambiguous Increase in Income Inequality 1980 – 2005 CANSIMv21151621

6. Real equivalent after-tax income by income percentile

7. Inequality – the price ‘we’ pay for growth? 1980 – 2000: a ‘new normal’ in CanadaSources: (1914-1960: Urquhart, MC and K. Buckley (eds) "Historical Statistics of Canada"; 1961-2000 CANSIM I series I603501 (matrix 9467) CANSIM II series V717706 (table no. 3830003), CPI - CANSIM I series P100000 matrix 9940, CANSIM II series V735319 table no. 3260001)

8. Density of log hourly wages of employees aged 25-64, 1981-2004

9. Individual Hourly Wage inequality - only part of the picture • Individual Net Annual Income • = Capital Income + Labour Earnings + Net Transfer Income • = (rate of return) * (Stock of wealth owned) • + (hourly wage)*(hours worked weekly)*(weeks worked per year) • + Government Transfer Income – Taxes Paid • Net Annual Family Income • = Net Annual Income of Family Head • + Net Annual Income of Spouse (if any) • + Net Annual Income of any other family members • Household Disposable Income + Household Size + Sharing Rule => Individual Equivalent Net Income • Change in inequality, or correlations, of any component will affect inequality • `Neatly defined and unambiguous trends are unlikely to result from this multiplicity of factors.’Brandolini (1998)

10. TAA not TINA“There Are Alternatives”

11. “Reports from the New Frontier” • Data Epochs in Income Distribution Analysis • 1. pre-1975 • Macro-shares, Cross-sections, Paper Tables • 2. 1975 + • Computers + micro-data from sample surveys enabled disaggregation & hypothesis testing • Explosion of labour economics research • OK for ‘Middle 90%’ – but tails ignored !! • 3. 2000 + • Income tax data used to examine top end • Large samples enable examination of top tail (1% +) • Piketty, Saez, Atkinson & Piketty, Saez & Veall • In Anglo countries – essentially all the change in income distribution has been in share of top 1% • ‘Pulling Away’ of elite incomes – huge social issue

12. Brian Murphy, Paul Roberts and Michael Wolfson (2007) “High-income Canadians” Perspectives on Labour and Income – September 2007 Pages 5 to 17 Statistics Canada Cat No. 75-001-XIE

14. Changes in real income largest in top percentiles

15. Income Trajectories of High Income Canadians 1982-2005: IARIW 2008Murphy, Michaud & Wolfson – Statistics Canada • “rise in income shares is dominated by a large growth concentrated mostly in the top 1% of the distribution” • “almost half of the entire increase in the top 5% was due to the top 0.1% of filers”

16. Absolute Change in Income Shares for Various Total Income Quantiles Between 1982 and 2005 Source: Statistics Canada, Special Tabulations from the LAD.

17. “Of all filers who made it to the top 5% in any given year, what part of the income distribution did they come from the year before?” • 75% - 80% of the top 5% were in same top 5% in previous year • 92% from top decile • “quite recently .. increase in the proportion of top 5 % filers staying put” • Correspondingly low percentages of lower deciles moving into top 5%

18. Summary • “growth is largely limited to the top 5% which in turn has been driven largely by increases to the incomes of the top 1%” • “marginal increase in the stability of the high income population” • on a year-over-year basis • over longer periods of time • more variability in the lower part of the distribution than in the 95%-99% • general decrease in the variability of income • No Evidence for: • “Greater Returns for Greater Risk” Ho

19. 4 crucial issues • “The other 49% of GDP” • the rate of return to capital; • inequality of wealth ownership; • Income share of top percentiles • Why such large increases? • the least well-off • now a much nastier reality for those at the bottom

20. The rise & fall of labour’s share- now about 51% of GDP

21. Real interest rate increase1954-80: 0.94% 1980-2000: 4.42%

22. Shares of Wealth – The Net Worth ofCanadian Family Units 1970 to 2005

23. Median Net Worth by Decile- why so little accumulation below top 10%?

24. The BIG NEWS in Canada & USA – sharply rising income share at very top

25. Direct effect of transfers and taxes on Gini index of inequalityAll families, 1976 to 2004

26. Alberta Welfare Income Couple + 2 Kids - 2005 $ 30% real cut by provincial SA 1986-2005

27. OECD (2008), Growing Unequal? : Income Distribution and Poverty in OECD CountriesCOUNTRY NOTE: CANADA

28. Income Gains concentrated at the top of the hierarchy – is this sustainable? • Top 0.1%1992-2004 • Family Income = $2.493M • Annual growth = 6.1% • Annual $ increase = $152K • ‘Pulling Away’ • Large % gains at top on large base imply increasingly conspicuous gulf • Middle 90% - nil gain? • Nastier @ bottom • Benefits of Growth largely received by top percentiles • Is this socially sustainable?

29. Social Assistance – low and falling NATIONAL COUNCIL OF WELFARE: WELFARE INCOMES 2005

30. Poverty Rate – rises & falls with unemployment / cycle

31. Rising Poverty Gap – particularly since 1995

32. Only the top 1% has increase in income share in Canada !THE EVOLUTION OF HIGH INCOMES IN CANADA, 1920-2000 Emmanuel Saez Michael R. VeallWorking Paper 9607 http://www.nber.org/papers/w9607

33. The BIG NEWS in Canada & USA – sharply rising income share at very topTHE EVOLUTION OF HIGH INCOMES IN CANADA, 1920-2000 Emmanuel Saez Michael R. VeallWorking Paper 9607 http://www.nber.org/papers/w9607

34. Total tax incidence proportional over most of range – progressivity erodes since 2000Marc Lee, (2007) Eroding Tax Fairness: Tax Incidence in Canada, 1990 to 2005 Canadian Centre for Policy Alternatives, Toronto November 2007

35. Marc Lee, (2007) Eroding Tax Fairness: Tax Incidence in Canada, 1990 to 2005 Canadian Centre for Policy Alternatives, Toronto November 2007

36. In Canada – redistribution is largely via spending, not taxation • Many tax incidence studies in Canada • Tax mix is a combination of progressive and regressive elements • Income tax is progressive – but less so recently • Payroll taxes – proportional to ceiling, then regressive • Sales taxes – provincial + HST/GST – regressive • Municipal property taxes – tax on shelter is regressive • Gillespie (1970s/1980s) – total tax incidence is proportional over most of the income range • Transfers are pro-poor – but down since 1995 • “Social Wage” - public services delivered in-kind • Tend to be equal per capita entitlement – hence equalizing

37. How large is the ‘Social Wage’?Marical François, Marco Mira d'Ercole, Maria Vaalavuo and Gerlinde Verbist (2006 ) PUBLICLY-PROVIDED SERVICES AND THE DISTRIBUTION OF RESOURCES OECD SOCIAL, EMPLOYMENT AND MIGRATION WORKING PAPERS NO. 45 December 2006

38. Lessons from Canadian Income Tax dataTHE EVOLUTION OF HIGH INCOMES IN CANADA, 1920-2000 Emmanuel Saez Michael R. Veall Pp. 226-227 in A.B.Atkinson and T. Piketty Top Incomes in the 20th Century Oxford University Press 2007 • Canada, UK, US, France – top income shares fell sharply during WWII & stayed down for 30 years • 1980-2000: sharp increase in top end shares • Concentrated in top 1% & even larger for top 0.1% • Not driven by tax law changes - no coincidence in trends • But big decline in top marginal rates • Similar trends for individual & family income • Not result of greater spousal income correlation • Income mobility – same or decrease since 1980 • Same concentration trend in 3 & 5 year average income • Probability still in top 0.1% approx same 1982-2000 • Labour income increase greatest in top 1% - • Less among Francophone Quebecers • Lags US increase in top CEO compensation • WHY? • Skill biased tech change cannot explain concentration of income gains • Emigration option to USA & ‘Brain Drain’ – the ‘threat effect’ & keeping up with US CEO salaries

39. What’s happening at the top? • Gabaix and Landier (2006, 2008), • explain 6x increase in CEO compensation in the US between 1980 and 2003 as “an equilibrium consequence of the substantial increase in firm size” • differences in individual effort or talent or incentives or qualifications play a minor role. • Is it ‘control’ or ‘ownership’ of Capital stock that matters? • Gabaix X, and Landier A (2006, 2008) Why Has CEO Pay Increased So Much? NBER Working Paper No. 12365 July 2006 Quarterly Journal of Economics, forthcoming

41. Canada in mid-range of OECD