Inequality has been in the news a lot recently. What is it exactly and is it just an American thing?
There are many types of inequality:
- Inequality of income - how income is distributed throughout a society
- Inequality of wealth - how wealth is distributed throughout a society
- Inequality of opportunity - someone’s ability to get an education and a job - their potential to succeed - often is determined by elements that they had no control over, their: gender, ethnicity, place of birth, economic circumstance, parental background.
- Political inequality - when people have greater influence over political decision-making than their numbers merit and benefit from unequal outcomes through those decisions. The end of one person, one vote.
Some inequality is inevitable because people are different. But the scale of inequality within a country is not inevitable. It is not a law of nature. It is a choice shaped by many policy decisions that determine how a country functions. I’m going to drill down a little on a form of economic inequality, income inequality.
When measuring the spread of incomes of a country economists like to use a metric called a Gini coefficient which measures how a country compares to a hypothetical one where everyone earns the same amount. Zero means everyone is equal, one is when one person earns the entire income of the country. The hyper-industrious Salman Khan has a great explanation of how to calculate a Gini coefficient here.
Although it’s a commonly used to measure income inequality it’s still one number and like an average can mask a lot of things. To understand inequality over time graphs are useful. Conveniently, Statistics Canada breaks down the historical income of Canadians by decile. This data is from the Canadian Income Survey which includes:
All individuals in Canada, excluding residents of the Yukon, the Northwest Territories and Nunavut, residents of institutions, persons living on reserves and other Aboriginal settlements in the provinces and members of the Canadian Forces living in military camps. Overall, these exclusions amount to less than 3 percent of the population. - Statistics Canada
Here income refers to refers to earnings (from employment and net self-employment), net investment income, private retirement, income, government transfers after taxes.
For about thirty years there was very little change between the deciles. Then, in the mid-nineties the lines began to spread apart showing how each successive decile of income began to get richer faster.
I’ve added a linear regression line to the income curves from 1995 onward. The number to the right of the decile name is the slope of the line. So, the rate of increase of income of the highest decile is 39 times (7.8 / 0.2) faster than that of the lowest decile.
This trend of the richer you are the faster your income increased was evident in the top 1%, 0.1% and 0.01% of income earners as seen here:
The slope of the highest decile in the first graph has been crushed into a horizontal line by the hyper growth of income of the top 0.01%.
Income inequality is alive and well in Canada and began in earnest in the mid nineties. That same mid-ninety disconnect can be seen when we look at corporate profits and employee compensation as a share of GDP. Let’s force those two ratios to both be 100 for 1961 and watch how they diverge over time.
For more than thirty years the share of corporate profits as a percent of GDP oscillated around the share of employee compensation as a share of GDP - sometimes more, sometimes less. Then it disconnected in the mid-nineties and after tax corporate profits began to take a larger share.
Increasing income inequality is a global phenomenon seen in most advanced industrialized economies. lets look at Canada, the USA, and Sweden from the mid-nineties onward. I don’t have decile data for the US since they prefer to use quintiles which divide income groups into five equal sized chunks.
To ensure an apples to apples comparison I’ll convert the three different currencies into a common currency using a PPP weighted exchange rate that takes into account the cost of goods in a country so as to compare buying power across different countries.
According to the latest available comparable data, no other country has seen a faster increase in inequality since the 1990s than Sweden.
At first glance it appears that Swedes are less well off than Canadians. However, Sweden has a larger “cradle to grave” social security system that differs from Canada’s in many respects. Two that stood out for me were pharmaceutical coverage and pensions.
You pay out of pocket for prescription drugs but the amount is capped at about $250 Canadian per year.
In Sweden, you contribute a lot more to your old age pension. A mandatory 18.5% of your income goes toward your pension. CPP in Canada is only 10.2% and is split equally between employee and employer. There are also separate occupational pensions that your employer pays. American employees must pay 12.4% to Social Security, again equally split between employee and employer.
A final observation of the US data shows the bottom 40% of wage earners losing ground and the next 20% at break even over the last 20 plus years.
Everyone seems to have a pet theory as to the cause of the rise in equality. Here are some of the top contenders:
- Decrease in strength of labour unions
- Declining quality of education
- Excessive use of stock buy backs
- Financialization of the economy
- The increasing influence of economists in the public policy arena
As for solutions, Nick Hanauer had an interesting article in The Atlantic Magazine recently.
Today, after wealthy elites gobble up our outsize share of national income, the median American family is left with $76,000 a year. Had hourly compensation grown with productivity since 1973—as it did over the preceding quarter century, according to the Economic Policy Institute—that family would now be earning more than $105,000 a year. Just imagine, education reforms aside, how much larger and stronger and better educated our middle class would be if the median American family enjoyed a $29,000-a-year raise.
In fact, the most direct way to address rising economic inequality is to simply pay ordinary workers more, by increasing the minimum wage and the salary threshold for overtime exemption; by restoring bargaining power for labor; and by instating higher taxes—much higher taxes—on rich people like me and on our estates.
– The Atlantic Magazine, July 2019