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Government policies have widened Canada’s income gap


The fact that income inequality in Canada today is significantly greater than it was 30 years ago is not in serious dispute. But there is much less agreement on the underlying causes.

It is important to look at trends in the “pre-distribution” of income by the market in the form of wages and salaries, and changes in the impact of government taxes and income transfer programs that redistribute market income from the more affluent to the less affluent.

Economists tend to emphasize the former, seeing inequality as mainly rooted in changes in the labour market and in the returns to capital and labour brought about by big forces such as globalization and technological change. But other scholars point out that politics still matters a lot, and that national experiences differ a great deal.

In an important recent book, Inequality and the Fading of Redistributive Politics, Keith Banting and John Myles argue that, while rooted in the market, politics has also been a major force behind rising income inequality in Canada. They emphasize the impact of deep cuts to income transfer programs for working-age Canadians in Canada’s “neo-liberal moment” in the mid-1990s.

Their argument is reinforced by Statistics Canada research by Andrew Heisz and Brian Murphy presented to a recent Institute for Research on Public Policy conference on income inequality.

Rising market income inequality in Canada over the 1980s and continuing into the 1990s was broadly offset by redistributive government policies until the early 1990s. However, for a decade, from the early 1990s to the early 2000s, the redistributive impact of the personal income tax and income transfer system faded significantly, and then stabilized at a lower level.

This change was almost entirely due to changes in income transfer programs, as opposed to changes in the personal income tax system. And the big change was cuts to unemployment insurance (UI) and social assistance.

Combined benefits for the two programs fell from almost 7 per cent of total market income in the early 1990s to about 3 per cent in the early 2000s; each of the two programs accounted for about half of that decline.

At the same time, public pension benefits were broadly unchanged as a share of market income, and there was a modest increase in child benefits of 0.5 per cent of total market income.

Mr. Heisz and Mr. Murphy note that to have much impact on overall income inequality, a government transfer program must be both progressive, providing greater benefits to the less affluent, and large in scale. UI and social assistance both fit the bill.

Of course, UI and social assistance benefits fell relative to market incomes partly because of the 1990s economic recovery. But major program changes in the first half of the 1990s also played a big role.

Key changes to UI by the Chretien government included a freeze in benefit levels relative to average earnings for a decade, and much reduced eligibility for and duration of benefits for frequent recipients. Meanwhile, the Klein and Harris governments in Alberta and Ontario, respectively, slashed social assistance benefits, and increases lagged well behind inflation in almost all other provinces.

Changes to these income benefits for working-age Canadians in need were justified in the name of deficit reduction and limiting supposed disincentives to work. Their key impact was to make the incomes of middle- and lower-income working families much more dependent on earnings in the job market.

The problem is that a rising percentage of working Canadians can find only insecure and part-time jobs at low wages. The major reduction of EI and social assistance income benefits has not been matched by other means of propping up low incomes from work, such as tax credits for the working poor and child benefits for low-income families. These remain relatively small programs.

Addressing rising income inequality will mean coming to terms not just with long-term trends in the market, but also with the political decisions we made some 20 years ago.

This article originally appeared in the Globe & Mail's Economy Lab.