The Pearson Centre for Progressive Policy

Progressive Dialogue and Policy for a Better Canada

Canada Needs an Economic Staircase

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July 23, 2015

Canada Needs an Economic Staircase

By Terrance Hunsley

Increasing economic inequality is affecting Canada as well as many other advanced economy countries. The playing field has a hard tilt for people of modest means who want their children to achieve a better life. Where a free and mandatory public school education used to give the majority of children a chance to get a middle class job, post secondary education or specialized training is now a minimum requirement and opportunities are not equal. Not only has it become harder for low income families and youth to achieve a higher income, but the middle range itself is slowly stretching into a smaller upper portion and a larger lower portion. Although growth in productivity in the Canadian economy has been slow over the past three decades, the gradual cumulative benefit has been substantial and has accrued to the owners of capital, not labour. The majority of Canadian families are working more hours just to stay where they are, and are taking on more debt. Canada is a wealthy country but most Canadians are not seeing their fair share of the benefits. Because of the skewing of income statistics by the accumulation of wealth at the top, to have the average household income in Canada now, you need to be at about the seventieth percentile on the income scale.(See Footnote(1) for research references.)

The nation needs a progressive policy orientation to ensure that the benefits of the economy accrue to its broad population and not just to the fortunate few. People at the bottom of the earnings scale should have enough to participate with dignity in their community, and have equal opportunity based on merit and effort, to move up the scale. Canadians want the benefits of social mobility. And jobs should pay enough to support a decent lifestyle – otherwise they should not be called jobs. (Perhaps we could call them “Ulo’s” – underpaid labour opportunities. ). This is, at base, a call for fair sharing of economic well-being. It is not about reshaping the economy, but a challenge to government to provide social infrastructure that rewards merit and effort in an economically efficient manner.

It is not an easy task for the federal or provincial governments to reverse the global trend of inequality. Not only do they have important competing priorities (pensions, health care, social care, the environment, terrorism, etc) but they no longer have strong economic policy levers. International trade arrangements (for better or worse) have gradually reduced the scope of national regulatory systems and tax systems, while labour standards have been weakened. Information technology and the free global movement of capital have given private entities important strategic advantages over governments. In recent decades, the Canadian government has responded to globalization of trade and investment by reducing taxes and thereby government revenues. The federal government’s share of GDP has according to some analysts been reduced from as high as 23% to about 14% since 1993,(2). Finance Canada figures show that the decline in federal revenues (rather than expenditures) between 1991 and 2012 was from 18% of GDP to 14%. (3) A stunning decline which Finance Canada attributes to tax reductions. Consequently the federal government has less spending power and less of an economic presence. Not surprisingly in recent decades Canada has come to spend a smaller percentage of GDP on social programs than many other OECD countries including the USA. (4)

Global corporations, global supply chains, the information technology revolution and a downward spiral of production wages, make it hard for a national government to take bold action. The literature abounds with arguments to tax the rich and give to the poor or the middle class, as well as the offsetting fear that the rich will offshore their money to fiscal havens. The same argument has been used against taxes on wealth, such as inheritance taxes. As long as there is no international consensus to tax the wealthy no matter where their money is, these arguments will continue to be strong deterrents. And according to the OECD (5) income tax policy is proving increasingly ineffective in generating government revenues from wealthy individuals and corporations. The pattern in some countries has been to cushion the blow to the poor by taxing the middle class, but when the middle class is seen to be losing ground this is a limited proposition. And of course there are arguments (false ones) that inequality is necessary for economic growth, and that the market rewards the ambitious at any income level. The OECD has been warning member governments about the dangers of increasing inequality.

The evidence that the trend increases in income inequality have dragged down growth in many OECD countries has significant policy consequences. In particular, it challenges the view that policy makers necessarily have to address the trade-off between promoting growth and addressing inequality. While previous work by the OECD has clearly shown that the benefits of growth do not automatically trickle down across society, the new evidence closes the circle by suggesting that inequality also matters for growth. Policies that help to limit or reverse inequality may not only make societies less unfair, but also wealthier. (6)

The other impediment to bold public policy is an increasing lack of social consensus within the country, driven at least in part by increasing social and cultural diversity. (7) Canada is rapidly approaching the point where the majority of the labour force in the larger cities will be made up of minority population groups. The population is becoming more socially and culturally heterogenous. Political support for social infrastructure such as social, health, recreation and education services, social insurance and income-related subsidies, requires public confidence that the needs of contributors and beneficiaries will be reasonably balanced, at least over the life course. Although a socially diverse society brings great cultural richness, it also makes social consensus more difficult to achieve.

So Canada needs solutions that can gain support across social and income groups, where the benefits of equal life chances for quality of life and prosperity are understood. An economic staircase needs to provide opportunities for all people to provide a decent living for their families and contribute to their community and the economy.

So a three-part plan:

1. Phase in minimum wage increases. The federal government has a restricted role in this regard but can still show leadership in its jurisdiction and in discussions with provincial governments. Minimum wage increases may cause some marginal low-paying jobs to be eliminated in favour of automation, especially in the retail, food service, accommodations and tourism sectors. But this will lead to increased productivity and with a smaller generation of young people entering the market, this may be the best time for that adjustment.

2. Significantly increase the Working Income Tax Benefit (WITB) so that low wage workers can afford a normal lifestyle. The federal government has the jurisdiction to do this. However it will be necessary to ensure that provincial governments do not reduce current public services and income – tested supports, thereby undermining the intended improvements. (Not to suggest that they would normally do so, and indeed some provinces have augmented federal transfer programs. But opportunities exist in the Canadian system for one order of government to offload on the other and both have done so in the past.) The federal government has policy instruments to guard against this, including transfer payments and equalization payments to provinces.

The costing of changes to the WITB require careful modelling of the amount for singles and families, the level of income at which it becomes available, the level at which it begins to decrease and the level at which it is completely phased out, as well as measures of take-up, wage rates etc. (8) The current structure of the WITB appears to be targeted toward part – time workers, and this should be changed, to focus on bringing substantial assistance to full-time or full-time equivalent workers. Part-time work should be for students or people who expressly prefer it, and industry should not be subsidized, as they are through the current WITB, to structure their work into part-time segments.

3. Introduce federal educational bursaries which are universal but scaled to family income, and which support both tuition and living costs. Parental contributions should only be phased in at above average family income levels.This benefit would have built in incentives, since receiving it each year would be conditional on achieving grade standards the year before.(Otherwise a student loan may be used to achieve reinstatement) It should apply to a wide range of education, including apprenticeship, technical and trades occupations. The program would not be available for institutions or locations where provincial governments do not maintain their current fiscal support, or where they permit opportunistic escalation of tuition fees. This policy will be expensive and the scaling to income may need to be adjusted as it is rolled out, and it may not at first be extended to programs beyond a baccalaureate level. However the incentives would encourage people to complete their studies quickly and it would also foster broad competition for accreditation supported by co-operative and apprenticeship work assignments. Canada has been doing well relative to the OECD countries in the percentage of adults who have tertiary education. However, inequality reflects the distribution of education as much as the general attainment. In a country where many have tertiary education, those who don’t suffer the consequences. (See footnote (9))

Costs and Benefits of an Economic Staircase

Cost estimates for this proposal would require many starting assumptions such as economic performance, employment levels, take-up levels, business decisions, demographic developments, behavioural measures and individual choices etc. It would be easy to drastically understate or overstate the costs, especially when they need to be balanced against offsetting impacts. It seems a more practical approach to set aside an allocation for the initial phase of implementation and to adjust the amount each year based on experience, until the program reaches the level of achieving its outcome objectives. Those outcomes would be that:

A. No youth is held back from education or training due to financial hardship,
B. No individual or family where the adults are working full-time will have an income, after taxes, transfers, of less than the Low Income Measure (half of the median individual/ family income adjusted for family size). There would be a strong argument to include the costs of insurance for health, dental and disability as well as child care, into these calculations. Moreover the phasing out of benefits above that line would provide substantial assistance to approximately the bottom third of families on the income scale, and would reach up with smaller amounts into the middle range.

As for an initial allotment, an amount of $10 billion per year would permit rapid introduction of educational bursaries and phased in WITB increases. Given that federal revenues were at about $271billion in 2013/14, and that they have been declining as a proportion of GDP for several years, this would require a relatively modest tax increase. It could be targeted to the top third of the income scale. Additional amounts could be made available incrementally by removing income splitting benefits to rich couples, reducing TFSA limits, and by calculating the increase in GDP and tax revenues which would result from higher education levels and higher productivity. Research reported in the International Productivity Monitor estimates that closing the gap between educational levels of Aboriginal Peoples and other Canadians would, by itself, generate some $10 Billion per year increase in GDP. (10)

The benefits of these measures, aside from the outcomes stated above will be:

– Reduced poverty, based on work effort, and improved living conditions for the bottom one-third of working families.
– Increased incentives to be in the formal workforce rather than dependent on passive income support or involved in the underground economy.
– Public confidence that the Government of Canada has a positive and efficient plan to ensure equal opportunity and quality of life.
– Rapid and broad improvements in training of the workforce and consequent increased productivity and higher government tax revenues.

The federal government has the technical capacity to evaluate this kind of initiative, including the economic and fiscal benefits which it would generate. Canadians are resistant to tax increases in part because they hear only about the costs and not the economic benefits of various programs. This would be a good opportunity for national learning with regular reports to Parliament and the public about the costs and benefits of an Economic Staircase.

Footnotes

(1) Solid research shows that social mobility is slowing down in most countries including Canada, and that inequality is increasing. See for example Miles Corak, Income Inequality, Equality of Opportunity and Intergenerational Mobility, IZA (Institute for the Study of Labour, Discussion Paper 7520, July 2013, The International Social Policy Monitor, Is the Timing Right to do Something Serious about Inequality in North America, www.politudes.com, OECD. Divided We Stand, OECD Divided We Stand: Why Inequality Keeps Rising , OECD 2011, Kevin Mackay, Neoliberalism and Postsecondary Education: A View from the Colleges. Academic Matters, academicmatters.ca, accessed May 16,2015; for the reference on average household income being at the 70th percentile, see LWS Working Paper Series No. 12 Luxembourg Income Study (LIS), Mapping and Measuring the Distribution of Household Wealth: A Cross-Country Analysis, Frank Cowell, Eleni Karagiannaki and Abigail McKnight October 2012 http://www.lisdatacenter.org/wps/lwswps/12.pdf
(2) Neil Reynolds, Incredible Shrinking Government, Globe and Mail, Mar 23,2012 theglobeandmail.com,
(3) Finance Canada Revenue Ratio : Revenues as percentage of GDP, fin.gc.ca accessed May 18, 2015
(4) International Social Policy Monitor, Lessons about National Social Spending, www.politudes.com
We should also note that Canada and provincial governments, after reducing social assistance caseloads dramatically between 1995 and 2000, have been acting to try to ease the situation for the working poor, as those numbers ballooned between 2000 and 2005, partly as an effect of making social assistance more difficult to get. Provincial government increases in minimum wages, introducing the federal Working Income Tax Benefit, Increasing the Canada Child Tax Benefit and introducing a National Child Benefit Supplement as well as a Universal Child Care Benefit, and several provincial credits and supplements, have brought many low income workers nearer or above the Low Income Measure. Despite these efforts, research by the Metcalfe Foundation found that the working poor, as a proportion of the total working age population still increased between 2006 and 2012, from 6.4 to 6.6% and in Toronto, from 8.8 to 9.1%. Toronto and Vancouver, the richest cities in Canada, with the greatest diversity, also have the largest percentages of working poor, and author John Stapleton points out that over the past twenty years in Toronto, the only occupational categories which have grown in absolute numbers despite the growing population, have been professional/knowledge workers and service entry workers. All other categories have been stagnant or shrunk. (John Stapleton and Jasmin Kay, The Working Poor in the Toronto Region, Metcalfe Foundation, April 2015)

(5) OECD Policy Challenges for the Next Fifty Years, OECD, 2014
(6) FOCUS on Inequality and Growth © OECD December 2014
(7) International Social Policy Monitor www.politudes.com , Does Social Diversity Undermine Public Support for Social Insurance?
(8) The Caledon Institute has done a good job of demonstrating these variables in a presentation to an all-part Parliamentary Committee on Poverty. Enhancing the Working Income Tax Benefit, caledoninst.org
(9) The OECD, in Education at a Glance, 2014 points out the following:

The data on earnings also point to a widening gap between the educational “haves” and “have-nots”. Across OECD countries, the difference in income from employment between adults without upper secondary education and those with a tertiary degree continues to grow. If we consider that the average income for 25-64 year-olds with an upper secondary education is represented by an index of 100, the income level for adults without upper secondary education was 80 in 2000 and fell to 76 in 2012, while the average income of tertiary-educated adults increased from 151 in 2000 to 159 in 2012. These data also show that the relative income gap between mid-educated and high-educated adults grew twice as large as the gap between mid-educated and low-educated adults. This means that, in relative terms, mid-educated adults moved closer in income to those with low levels of education, which is consistent with the thesis of the “hollowing-out of the middle classes”.
Changes in the income distribution towards greater inequality are increasingly determined by the distribution of education and skills in societies. Across OECD countries, 73% of people without an upper secondary education find themselves at or below the median level of earnings, while only 27% of university graduates do. Educational attainment is the measure by which people are being sorted into poverty or relative wealth; and the skills distribution in a society – its inclusiveness, or lack thereof – is manifested in the degree of income inequality in the society. Countries with large proportions of low-skilled adults are also those with high levels of income inequality, as measured by the Gini coefficient, as are countries with a polarised skills profile (i.e. many low-skilled and many high-skilled people, and the skills distribution is usually linked to socio-economic background).
The risks – and, in many instances, also the penalties – of low educational attainment and low skills pertain not only to income and employment, but to many other social outcomes as well. For example, there is a 23 percentage-point difference between the share of adults with high levels of education who report that they are in good health and the share of adults with low levels of education who report so. Levels of interpersonal trust, participation in volunteering activities, and the belief that an individual can have an impact on the political process are all closely related to both education and skills levels. Thus, societies that have large shares of low-skilled people risk a deterioration in social cohesion and well-being. When large numbers of people do not share the benefits that accrue to more highly skilled populations, the long-term costs to society – in healthcare, unemployment and security, to name just a few – accumulate to become overwhelming.
Indeed, the increasing social divide between the educational “haves” and “have-nots” – and the risks that the latter are excluded from the social benefits of educational expansion –threatens societies as a whole.
(10) Matthew Calver, Closing the Aboriginal Education Gap in Canada: The Impact on Employment, GDP and Labour Productivity, International Productivity Monitor, 28th Issue, 2015

Terrance Hunsley is a retired but not tired policy wonk who has taught as a Fellow of the Queens School of Policy Studies, been CEO of the Canadian Council on Social Development, the Biotechnology Human Resources Council, the International Centre for Prevention of Crime, and sundry other jobs. He currently edits the International Social Policy Monitor (www.politudes.com) and is a Senior Fellow with the Pearson Centre.

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