OPINION: Canada is good at sharing, but not growing, the economic pie

August 5, 2020
Jock Finlayson

It can be tempting to follow U.S. news and assume that Canada faces the same challenges as our neighbour when it comes to income inequality. However, the data do not support that assessment. Since the early 2000s, Canada has for the most part been getting better at sharing the economic pie. Unfortunately, the country has been less successful in increasing the size of that pie, which does not augur well for a swift postpandemic recovery.

The best-known measure of inequality is the Gini coefficient. It ranges between zero and one. Closer to zero indicates that incomes are more evenly distributed across the population. Closer to one means they are more concentrated. In 2018, Canada’s Gini coefficient was 0.428 for market incomes (income before government taxes and transfers) and significantly lower, 0.303, for disposable incomes, according to Statistics Canada. The gap between the two numbers indicates that public policy does a good job redistributing market income.

It's been a long time since either Gini measure was on the rise. The opening up of the economy to global trade and new technologies did see income inequality increase in the 1980s and 1990s. But the Gini coefficient for market incomes peaked in 1998, at 0.446, and has slightly decreased since then. Meanwhile, the Gini coefficient for disposable incomes peaked at 0.322 in 2004 and subsequently has retreated to about the same level as in 1976.

On income inequality, Canada compares well with other Group of Seven countries and also with Australia and New Zealand, two resource-based economies with similar institutions and similarly educated work forces. According to Organization for Economic Co-operation and Development data, adjusted for international consistency, Canada has the lowest Gini coefficient among this peer group for market incomes and the third-lowest for disposable incomes (see table).

One criticism of the Gini coefficient is that it tends to be more reflective of the middle of income distribution than the extremes. The OECD calculates additional income inequality measures that focus on various ratios of deciles and quartiles within the distribution. These include the P90/P10, P90/P50, P90/P40, P50/P10 and S80/S20 ratios. They show Canada’s income inequality to be either the lowest or close to the lowest among the peer group. Moreover, the measures for Canada have tended to be steady or declining since the early 2000s.

At the upper end of the distribution, Statscan data show that the share of total income accruing to the top 1 per cent rose across the late 1980s and 1990s – but peaked in 2006. Since then, the share has trended lower for both market and disposable incomes. Thus, on overall income inequality, Canada has a positive story to tell.

But the country has struggled to expand the economic pie to keep pace with its steadily growing population. Despite low unemployment, growth in GDP per person averaged a dismal 0.3 per cent per annum in the five years prior to 2020. Capital investment per worker has been falling and labour productivity growth has been sluggish, contributing to feeble gains in real employee compensation across the most recent economic cycle.

Rather than obsessing over income inequality, Canadian policy makers should concentrate their efforts on boosting productivity, streamlining outdated and needlessly burdensome regulations, spurring innovation in the business sector and scaling more Canadian-based companies. Making progress in these areas is the most promising way to strengthen the foundations for long-term prosperity in the postpandemic world.

David Williams, DPhil, is Vice President of Policy at the Business Council of British Columbia. Jock Finlayson is the Council’s Executive Vice President and Chief Policy Officer.

As published in the Globe and Mail.

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