January 18, 2018

Canada & OECD Reducing Income Inequality?

By Terrance Hunsley, Senior Fellow, The Pearson Centre

Fourth in a series: Futures Entwined: The Nation State and the Welfare State

Many people, especially social advocacy groups, feel that government commitments to the welfare state started a long period of retrenchment in the late seventies. The idea that a country can insulate its citizens from economic risk and ensure an adequate standard of living, has been seen as utopian in mainstream politics in recent decades. The evidence that most people see, is the increasing economic inequality among the working population, and between them and the uber-rich. Indeed, Barack Obama cited inequality as the defining challenge of our times.

A study by a group of researchers at Leiden University in the Netherlands, shines an analytical light on the issue, asking to what extent countries have been willing, or able, to offset increasing inequality. More specifically, how much have these governments undertaken to redistribute income within their societies?

The research, published as a working paper on the Luxembourg Income Studies (LIS) website, is titled, Income inequality and fiscal redistribution in 47 LIS-countries, 1967-2014. (1) The researchers used the LIS database, as well as data from the OECD, to review how governments adjusted their policies of income redistribution to the increasing inequality in market incomes.

Their research confirmed first, that inequality has increased in almost every country over the period. They also confirmed that the cause, prima facie, has been increasingly unequal labour market incomes. They do not however, attempt to compare labour income trends with returns to capital. So aside from the accumulation of global wealth among the super-rich, labour markets are fragmenting into high end and low end jobs. People know this. They can see it. The 2016 census confirmed that less than half of the Canadian labour force have full-time, year-round jobs.

The study looked at:

– the extent of government action to redistribute income;
– whether that redistribution increased or receded over the past few decades;
– the policy levers used for redistribution;
– to what extent the market income inequality was offset or reversed;
– and who benefited, and who did not, from redistribution.

Their measure of inequality was the Gini Coefficient. This measure does not focus on poverty vs wealth, but on the dispersion of incomes across the entire income range – in essence, how closely gathered are individual (or in this case, household) incomes around a middle measure, like the median? The higher the coefficient, the more distance or dispersion among the household incomes. They measured the coefficients of each country for pre-tax, pre-(receipt of) transfers, and post-tax/transfer incomes. The three main periods of measures were the early eighties, the late nineties, and the 2010-2013 period.

The first measure showed that inequality of market incomes has been increasing in all countries. They did not attempt to explain why this has been happening, but other studies, including by the OECD, have shown it to be the result of globalization of finance and production combined with advances in technology and automation. These together have changed the entire structure of national economies. An over-simplified, but acceptable illustration is the disappearance of manufacturing jobs and the growth of both high and low level service jobs. During this process, many countries including Canada, competed to keep business interests in the country. They allowed minimum wage and social assistance levels to slide behind inflation and reduced labour market regulation. This permitted employers more freedom to fragment work into part-time jobs, not provide job security or health and disability insurance, and to divest themselves of responsibility for secure pensions. Canadian families offset the stagnating value of their wages by working more hours and by taking on higher debts, especially for housing, which many saw as their most secure hedge against poverty in old age.

The second measure showed how much each country was able to offset inequality through redistribution. Here, the data shows that most countries did in fact increase the amount of income redistribution. In Canada, increased transfers combined with a small increase in progressivity of the tax system, were able to offset about one third of the increase in market income inequality which took place over the period. The record varied significantly among countries. In the post tax/transfer Gini coefficients in the 2010-2013 time frame, Canada ranked at about the middle of all 47 countries, but almost all of the European countries did better jobs at reducing inequality. France, it appears, was able to offset more than 100% of the increase in market incomes, achieving a net overall reduction in inequality. (This will be a topic for future exploration.)

The researchers then measured how much of the increased redistribution resulted from increasing the progressiveness of tax policies and how much resulted from increased transfers – payments to people in different circumstances. Here the evidence was clear that in most cases including Canada, governments avoided making tax policies more progressive, and relied on increased transfers to offset inequality. The small amount of increased redistribution resulting from more progressive taxes was for the most part triggered by workers moving higher and lower on the income scale. As well, in countries like Canada, the “progressivity” of taxes starts at relatively low income levels.

Finally, who benefitted and who did not, from increased redistribution? Here the pattern was quite distinct, especially for Canada. The increased redistribution was not really a response to increased income inequality. It was a semi-automated response to population ageing. More elderly people; more total transfers paid to elderly people, disabled, and survivors. The generation who in their earning years paid for children and for the elderly, were now in position to rightfully claim their support payments. Except for some small increases for low income families with children, most of the increased redistribution was to the elderly. And to the extent that income inequality was offset, it was the increased number of elderly. Very few countries made significant attempts to offset the increased inequality in the labour markets themselves. So those people who sensed the retreat of the state over the past few decades from providing income security for people of working age, had it right.
(1) Income inequality and fiscal redistribution in 47 LIS-countries, 1967-2014 Koen Caminada, Leiden University & Netspar, E-mail: c.l.j.caminada@law.leidenuniv.nl Jinxian Wang, Leiden University, E-mail: j.wang@law.leidenuniv.nl Kees Goudswaard, Leiden University & Netspar, E-mail: k.p.goudswaard@law.leidenuniv.nl Chen Wang, Shanghai University of Finance and Economics & Leiden University, E-mail wang.chen@mail.shufe.edu.cn

Terrance Hunsley is also editor of the International Social Policy Monitor (politudes.com). He is a former Director General of the International Centre for Prevention of Crime, Executive Director of the Canadian Council on Social Development, and Fellow of Queen’s University School of Policy Studies.