Complexity no reason for inaction says MLI research director, but reason to ensure understanding precedes policy choices
OTTAWA, April 30, 2012 – On the eve of International Workers Day most people brace themselves for a spate of stories detailing the woefully unjust state of Canadian and other western societies, particularly when seen through the lens of inequality. And inequality is presented as a simple transparent phenomenon whereby the poor do not get their "fair share" of society's wealth while the rich hoard their wealth and avoid paying their taxes. This May Day, however, there is an antidote to the simplistic old narrative: MLI Research Director Jason Clemens' new paper on the real state of, and reasons behind, income inequality in Canada.
In Income Inequality: Oversimplifying a Complicated Issue, Clemens effectively challenges many of the unjustified beliefs Canadians hold about what inequality means and how it works.
Take, for example, the Occupy Wall Street theme that top income earners are not carrying their fair share of the tax burden. Not so, says Clemens: Top income earners in Canada earned 46.8 per cent of total income in 2011, but paid 54.4 per cent of the total tax bill. "Only the top 20 per cent of earners in Canada paid a tax burden in excess of their share of income."
How about the idea that Canada is a society where social and income mobility is a myth, and therefore that people who are at the bottom of the income scale are stuck there permanently? On the contrary: social mobility is highly dynamic in Canada and, given time, the most upwardly mobile people are those in the lowest income categories. Recent data shows that 1 out of 4 people who started in the bottom 20 percent, moved up out of the bottom within one year. Look over a five-year period and the number of people moving out of the bottom 20 percent jumps to 43 percent.
Then there is the idea that the most effective measure of inequality is income. But Clemens effectively points out that income, especially at the bottom end of the scale, is frequently and seriously under-reported. A far more robust picture emerges if we look at inequality of consumption, i.e. what the poor are actually able to buy compared to those with higher incomes. Such comparison of consumption rather than income reduces inequality by 30 percent.
Finally, Clemens points out that one of the most frequent mistakes in measuring inequality is the failure to recognize and adjust for the composition of households over time. Not so very long ago, for example, single-parent families were the exception. Today they are much more common. But single-parent households have always been much more associated with low-income than other kinds of households. Thus if we compare similar households over time, we find that their incomes remain quite comparable, but the share of households often characterised by low-incomes, such as single-parent families, has risen. Making the adjustments necessary to compare households properly over time reduces inequality by 30 percent.
The point of Clemens' paper isn't merely to bust myths about inequality. More importantly it is to ensure governments don't make poor policy decisions based on a misunderstanding of the problem they're trying to fix.
"Well-intentioned policies that misunderstand and oversimplify inequality can often make matters worse. For example, governments across Canada increased welfare benefit rates in the late 1980s and 90s. The result was that people got trapped in welfare and became dependent on income subsidies rather than employment as a means of sustaining themselves. Such dependency prevents mobility, which is a natural part of employment," explained Clemens.
In fact Statistics Canada argues that the most effective way to move people off low incomes is not to increase social welfare payments, but for more family members to work more hours. An employment maximization strategy, however, is often at odds with an increased welfare entitlement strategy. A proper understanding of how things work enables governments to focus on policies that produce the best outcomes, including for those on low incomes.
Jason Clemens is the Director of Research at the Macdonald-Laurier Institute (MLI) in Ottawa.
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The Macdonald-Laurier Institute is the only non-partisan, independent national public policy think tank in Ottawa focusing on the full range of issues that fall under the jurisdiction of the federal government. It initiates and conducts research identifying current and emerging economic and public policy issues facing Canadians. www.macdonaldlaurier.ca