Is Inequality really a problem?

Populations are unequal in many ways. People’s heights and weights are unequal. Musical abilities and many other abilities are not equally distributed. None of this causes any problems. But when it comes to inequalities around money – income and wealth – it is a different story. Is this concern justified?

Measuring inequality.

Measuring inequality is complicated. You can measure wealth or income inequality. You can measure income before tax, after tax, before or after social payments such as employment insurance, or you can measure disposable income. Wealth can be measured before or after tax, etc. You can measure it per person or per household. Statistically you can calculate a Gini coefficient for any of these measures. This measure is zero for complete equality and one for complete inequality. Wealth inequality is always larger than income inequality.

Inequality in Canada.

According to Statistics Canada, In terms of wealth inequality, the richest 20% of Canadians owned 67.7 per cent of the country’s total wealth at the end of 2023, an average of $3.3 million per household while the bottom 40 per cent of households held only 2.7 per cent of total wealth, an average of $67,038 per household.

Income inequality has risen in recent years. One reflection of this is the ratio of CEO pay to that of the average worker, as shown in the graphic below from Press Progress.

International comparisons

According to the OECD, Canada is in the middle of the pack when measuring the Gini index for disposable household income, more equal than the US or the UK and similar to France and Sweden.

Inequality in the US is much higher than in Canada. For instance, the before tax income share of the top1% in the US was 21%, compared to 11% in Canada, according to the World Inequality database. The top1% owned 35% of net personal wealth in the US in 2022, compared with 25% in Canada.

History.

As Thomas Piketty showed, inequality has gone through significant cycles in the last one hundred years. The graphic below shows how the income attributed to the top 1% has changed in Canada over the last one hundred years. The period from about 1940 to 1980 was the most equal period.

Why does this matter for the economy?

The current evidence from the US appears to demonstrate that high levels of inequality do not slow down economic growth. The US is among the most unequal countries in the world and is currently demonstrating stronger economic growth than most other countries.

The National Bureau of Economic Research in the US concluded that high levels of inequality reduce growth in relatively poor countries but encourage growth in richer countries.

So, the evidence would appear to show that higher inequality actually helps economic growth.

What is the effect of inequality on society?

According to the IMF, excessive inequality can erode social cohesion, and lead to political polarization. The World Bank says extreme inequality can lead to entrenched poverty, stifled growth, and social conflict. There is a large literature showing the negative social effects of elevated levels of income inequality.

Historically some societies have remained stable for extended periods with very high levels of inequality, for example the medieval period in Europe and 19th century Britain.? But rapid increases in inequality give rise to polarization, lower social mobility, generate resentment and lead to political instability.

It has been well documented that there is a strong relationship between income and good health. A report from the ?JAMA Network revealed the startling fact that in the US the richest 1% live 14.6 years longer than the poorest 1%, on average.

How to decrease income inequality. It is not possible to recreate the situation between 1940 and 1980 where income inequality was very low in Canada, as the world has changed so much.? The Conference Board of Canada proposes that a well-targeted, means-tested minimum income, distributed federally, could help efficiently to alleviate income inequality among disparate groups. It also suggests that inheritance taxes could improve outcomes further and comments that access to health, education, and daycare also contribute to reducing inequality.

Conclusion.

High income inequality is not a problem for economic growth as evidence suggests that higher inequality increases economic growth. But it is a major problem for society as it can reduce social cohesion and lead to resentment, polarization, and political instability. Income inequality has risen in Canada since about 1980 but has reduced over the last 20 years or so. It is similar to that of France and Sweden and far less than in the US. Proposals to reduce income inequality include a targeted means tested minimum income, inheritance taxes and better access to health, education, and daycare.

Peter Josty