Canada’s middle class feels the brunt of the income inequality squeeze

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Today there is strong media and public interest in Canada, and indeed globally, in income inequality – but there is often confusion and debate about the facts. Getting an accurate answer about income inequality in Canada should start with a complete and accurate interpretation of the data.

Some commentators and analysts have based their views on the observation that although Canadian income inequality got relatively worse in the 1980s and 1990s, it appears to have gotten relatively better since the late 1990s.

We believe the more accurate interpretation is that after worsening in the 1980s and 1990s, income inequality and poverty in Canada remained stuck at a relatively high level during the 2000s. This interpretation should prompt the question, "Can anything be done about it?"

The 1990s were a difficult decade for Canadians. By the late 1990s, real median after-tax income fell to its lowest level in more than three decades, and income inequality reached its peak. Yet even though higher commodity demand and prices helped Canada's economy grow faster from 2000 to 2010 than most of its peers, including the United States, income inequality did not decline.

Median family income has increased since 1998, leading some commentators to reach the conclusion that the middle class is doing better now than in the late 1990s. However, that is only part of the story. The increase in median income masks the shifts occurring in and among different income ranges. Dividing the population into five income groups (or quintiles), real average after-tax income grew most strongly in the top quintile – those with the highest income levels. The bottom quintile grew second fastest, while the middle quintile – the true "middle class" in statistical terms – grew the most slowly. In fact, this middle 20 per cent of Canadians receive less of the total income pie today than it did in the late 1990s.

Furthermore, the gap between the top and bottom income quintiles increased the most in the 1980s and 1990s. The top 20 per cent got relatively richer, and the bottom 20 per cent got relatively poorer. The gap between richest and poorest quintiles grew more slowly in the 2000s, but it clearly did not shrink. The top income quintile increased its share of total after-tax income from 43.4 per cent in 1998 to 44.3 per cent in 2010. The share going to the bottom income quintile remained the same (4.8 per cent), while the share going to the three quintile groups in between (which could be broadly defined as the middle class) fell.

In short, it is statistically accurate to say that the middle class – at least as defined by having a mid-range income – is being squeezed in Canada.

And what about low-income Canadians, including those in poverty? Using Statistics Canada's Low Income Measure (LIM), the share of Canada's population in low income is somewhat smaller than during the mid-1990s, but it remains higher than it was in the 1970s and 1980s. Even if the income share of lower-income Canadians was stable in the 2000s and their incomes are rising modestly, Canada's performance is far from stellar. When put in the context of a relatively healthy Canadian economy from 2000 to the onset of the financial crisis in 2008, lower-income Canadians did not get that much further ahead.

There is no easy solution to income inequality. Investment in education – from early childhood through postsecondary – offers the greatest potential payback. Increasing access to the labour market also needs consideration. Both measures would also bolster Canada's already good record on income mobility – the ease at which people can move among income groups. However, a good record on income mobility does not override the social issues associated with high income inequality.

Thus, measures to reform the tax system should focus on improving the incentives to work for people trying to get off social welfare support – by lowering the "welfare wall" currently preventing entry into the work force. A guaranteed annual income system merits examination as a way to meet these goals.

Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada. Brenda Lafleur is director of the How Canada Performs research program at the Conference Board of Canada.