Income inequality can be described as the degree to which income in a country is distributed. It is an essential indicator of the level of equity in an economy and usually impacts the various social outcomes which include life satisfaction and crime rates (Murphy, Roberts, & Wolfson 2007). Over the years, income inequality has been on the rise in most of the OECD countries. Dealing with the trend has become one of the top policy agendas in many nations. The reasons for the increased interest by the policymakers' worries that the persistent increase in unbalanced sharing of the income might lead to social resentments, promoting populist agendas, and the emergence of protectionist sentiments that can ultimately lead to country's political instability. There is also the concern that cumulative and rapid increment in income inequality might negatively implicate economic growth and also affect how the country recovers from recession (Green, Riddell & St-Hilaire, 2017). Canada is increasingly beginning to feel the impacts of population aging and the need to engage more in the global economy through activities such as trade, immigration and foreign investments among others. This means the country needs to revisit some of its policies concerning labor markets, skills development, education and tax-and-transfer among others (Murphy et al., 2007). The country needs to understand the complex dynamics concerning income disparity to establish the best policy strategies or directions to follow to deal with the trends of inequality while at the same time enhancing economic growth.
Has Income Disparity in Canada Increased?
The figure shows the international income status for the top 1%.
There has been an increase in awareness among the Canadians that inequality has increased over the period of the last thirty to forty years. There has been an increment in the top 1%s income as compared to the income of others. The issue of income inequality in Canada has been confusing especially due to the inequality change over the years. The change has been detailed in Figure 1 below which entails a plot of Gini coefficient. Gini Coefficient is a measure of income disparity Green et al., 2017). The figure below shows income inequality for market income, total income and after-tax income from the year 1976 to 2011(Green et al., 2017). Market income can be explained by the income before tax deductions from all sources while after-tax income is the income after deduction of all taxes including transfers. Total income, on the other hand, is defined as the income before income deductions from all sources.
From Figure 1, there are three evident points. First, there was a significant increase in the family market income inequality over the thirty-five years period. This is shown by the rise in the Gini coefficient from 0.365 to 0.446 which was a 22% increase which a big change in the measure. Secondly, there was no steady trend upwards, but sharp increases in the inequality were recorded during the early 1980s and early 1990 recessions (Green et al., 2017). These were the two most serious Canadian recessions of the postwar era. Thirdly, it is noted there was a decline in the income inequality during the 1980s (between 1983 and 1989) which was a period characterized by recovery and boom. However, income inequality continued on the rising trend during last half of the 1990s which was a period characterized by a strong economic growth.
In figure 1, a plot of adjusted after-tax family income Gini coefficient has been shown. The curve for the adjusted after-tax family income and that of market income inequality curve shows the implications of tax-and-transfer in the real family incomes. The inequality did not increase by the mid-1970s and the mid-1990s after-tax income although there was a substantial increase in the market income inequality in addition to two major recessions. The redistributive influence of taxes and transfers has significantly reduced (Finio & Mishel, 2013). The result has been a rapid increase in the after-tax income inequality and market income inequality. The system of tax-and-transfer and its changes can be described as exacerbating and not offsetting, and this was evident between 1995 and 2000s. It is seen that there has been a significant rise in after-tax income inequality since 1980. The table below shows a percentage variations in the real yearly wages during the great recession.
Importance of Income Inequality
Income inequality is an issue with critical effects, and it is important for the society to deal with it. Historically, the issue of income inequality has been raised as a moral question concerning fairness and social justice. Income inequality has effects on the economy, social and political landscape (Dabla-Norris et al., 2015). Social inequality is the term used by sociologists in the description of the disparity of distribution concerning rewards, important resources, and positions in the society. Canadians that are considered to be in the bottom 99% feel they have been stuck in the tax bracket.
The Causes of Income Inequality
The Role of Technological Advancement
Income inequality has increased in many developed nations, and this has been over similar underlying causes. The driving forces have been emphasized to cause income inequality. One of the factors includes technological change mostly the advancement in the information and computer technologies. The main idea is that the emergence of new technologies has complemented skills concerning education and competence in the performance of cognitive skills. This means new technologies has led to enhancement of productivity of the skilled workers. Additionally, this has led to the replacement of workers performing routine tasks that can easily be completed by computers. This has led to reduced wages and employment for the workers who constitute the bottom 99% (Dabla-Norris et al., 2015). The new information technology has resulted in major productivity and well-being improvements by leaps and bounds. This aspect has also led to the increment of skill premium leading to an increase in labor income inequality. The reason is due to the disproportionate rise in capital and skilled labor demands as compared to the low-skilled and unskilled labor. There has been an elimination of many jobs due to various skill levels being automated or upgraded. The advancement in technology has contributed to the increased income inequality in OECD nations with Canada included. It has been noted to account for approximately a third of the increasing gap when the top 1% and bottom 99% earners are compared over the past twenty-five years (Dabla-Norris et al., 2015).
The Role of Globalization
Globalization is another factor that's been driving income inequality. Many operations that can be performed by computers can be cheaply performed by workers from other countries at lower wages. The changes in technology as considerably reduced distance and there has been a reduction in the cost of operation and transports of manufactured products. This has been due to the improved global reach of the multinational companies.
Globalization of Trade
Trade has been a driver for growth in Canada and many other nations since it promotes competitiveness and enhancement of efficiency. However, increased trade and financial flow between nations which has been partly made possible by advancement in technology have been cited to drive income inequality. Firms in advanced economies have been able to incorporate labor-saving technologies and offshoring (Dabla-Norris et al., 2015). This has led to reducing manufacturing and increase in skill premium. Also, there has been the mixed implication on wages of skilled labor due to the trade openness. This has the effect of raising the skill premiums but has a possibility of increasing real wages through the reduction of prices. It is important to note that trade globalization is a two-sided coin. Despite that trade globalization being cited can potentially lead to income inequality, there is also a likelihood that it can result to lowered income inequality.
Financial globalization has helped in facilitating efficient international allocation of resources. Also, there has been the promotion of risk sharing internationally. It has also been noted that the financial flows increase and portfolio has been cited to lead to the increment of income inequality.
The Role Played by Changes in Macroeconomics and Institutions
During the time of recession, the low income earning group experience loss in jobs in comparison to other groups resulting in fewer earnings for the top 1% as compared to the bottom 99%. In the time of recession, the key factors causing income inequality are magnified, and those that reduce income inequality are eroded.
Macroeconomic variations are those variations that affect the whole Canadian economy. These changes include recessions and economic growth. Economic growth slowdown characterizes recessions and increases in unemployment. When a country is recovering from the recession, there is growth in the economy, and there is an increase in employment. In Canada, the business cycle has historically determined the growth and retraction of rates of income inequality. It has been evidenced that income inequality increase in the 1960s and 1970s during a period of recession and minimized in the period of economic growth. During the recession that was experienced between 1981 and 1982, there was an increment in income inequality (Procyk, 2014). This was followed by a slower economic growth which was not adequate in slowing down the income inequality. In dealing with this income inequality, the Canadian government instituted tax and transfer system which compensated for the growth. This led to the improvement of market income inequality but not the after-tax income inequality. The tax systems were not able to deal with income inequality brought about by recessions of 1990-1992. This is due to slower economic growth in the 1980s and 1990s as compared to 1960s and 1970s (Procyk, 2014). Also, there was economic growth in the context of technological advancement and globalization which resulted in the reorganization of corporations. This led to many changes that had implications on the types and quality of jobs.
The changes of institutions in the Canadian government have had implications on the tax-and-transfer systems. Governments usually transfer payments to people as financial support through the institution of programs and services such as through social assistance, the Working Income Tax Benefit and the Canada Pension Plan. Social assistance, Employment Insurance, and other child benefit programs are the greatest impacts used by the government. Taxes and transfers have the role of redistributing income to individuals lacking enough income for them to meet their needs (Procyk, 2014). Various forms of redistribution can be used in the reduction of income inequality considering the economic conditions present. For instance, transfer systems helped to reduce increased income inequality in the 1980s. Primarily, tax and transfer systems are employed to compensate for the growth in the market income inequality. The effectiveness of this system in Canada was relatively high in the reduction of income inequality. It was able to offset approximately 70% of the income increase in market income inequality but this reduced to 40% after the mid-1990s (Procyk, 2014). However, the effectiveness of tax and transfer system in the reduction of income inequality except for some parts of the economy such as children and the seniors. This can be owed to th...
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