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Milligan: Inequality trends in Canada 1
Inequality in Canada: Trends and Policy Options
Kevin Milligan
Vancouver School of Economics
University of British Columbia
October, 2014
Milligan: Inequality trends in Canada 2
Inequality in Canada: Outline
Why should we care?
What are the trends?
i) Low-income
ii) Median incomes
iii) Earnings stagnation
iv) Income concentration at top
What are some policy options?
i) Taxes: Raise rates
ii) Taxes: Tighten base
iii) Reverse unionization slide
iv) At the top: Corporate governance?
v) Boost the middle: Education for the long run
Milligan: Inequality trends in Canada 3
Inequality in Canada: Why Care?
Many people care a lot about issues like:
Fairness: luck, reciprocity, there but for the grace of God go I…
Social exclusion, equality of opportunity.
Political influence of money: not as large an issue in Canada as US…
But even if you don’t care about the above, consider:
Need middle class to buy into pro-growth policies like international trade, efficient
tax policies.
Milligan: Inequality trends in Canada 4
Inequality in Canada: Four trends
Two of these trends suggest: ‘this isn’t a problem’…
i) Low-income levels are improving
ii) Median incomes are growing
…but digging deeper reveals some cause for concern.
iii) Earnings stagnation
iv) Income concentration at top
Milligan: Inequality trends in Canada 5
Trend #1: Low income proportion not getting worse…
11.6
14.5
9.0
12.712.1
13.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
1976 1981 1986 1991 1996 2001 2006 2011
Pro
po
rtio
n u
nd
er c
uto
ff
Year
Low Incomes 1976-2011
LICO
LIM
1980 1995 2010
Source:
CANSIM 202-0802
Milligan: Inequality trends in Canada 6
Trend #2: Median incomes moving up
$57,000
$49,600
$57,000
$49,500
$42,200$50,800
$46,300
$40,400$42,700
$23,100$25,800 $31,700
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
1976 1981 1986 1991 1996 2001 2006 2011
20
11
Ca
na
dia
n D
oll
ars
Year
Median Incomes 1976-2011
Family Before Tax
Family After Tax
Male Before Tax
Female Before Tax
1980 1995 2010
Sources:
CANSIM 202-0101
CANSIM 202-0401
CANSIM 202-0601
Milligan: Inequality trends in Canada 7
Trend #3: Earnings polarization hitting median males
$42,700$35,600
$36,000
$19,600$20,700
$24,600
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
$50,000
1976 1981 1986 1991 1996 2001 2006 2011
20
11
Ca
na
dia
n D
oll
ars
Year
Median Earnings by Sex, 1976-2011
Males Females
1980 1995 2010
Sources:
CANSIM 202-0101
Milligan: Inequality trends in Canada 8
Trend #4: Income concentration at the top
What is ‘the top 1%?’
Income (2010) you need to be in the top…
Group Income needed Percentile
Top 0.01 percent 2,571,300 P99.99 Top 0.1 percent 685,000 P99.9 Top 1 percent 201,400 P99 Top 5 percent 104,600 P95 Top 10 percent 81,200 P90 Top 50 percent 28,800 P50
Total individual income
Income shares: How much of the total pie of income goes to people in each of these
groups?
Milligan: Inequality trends in Canada 9
Top income shares (individual before tax), indexed to 1982=100
75.0
100.0
125.0
150.0
175.0
200.0
225.0
250.0
275.0
300.0
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
P99.99+
P99.9-P99.99
P99-P99.9
P95-P99
P90-P95
Milligan: Inequality trends in Canada 10
Growth in Real Individual Before-Tax Income, 1982-2011
Notes: The source is CANSIM series 204-0002, which is based on taxfiler data. Graphed is the percent growth between 1982 and 2011. The
income measure is total income before capital gains, and the data are inflation adjusted by the all-items CPI.
1%
15%7%
16%27%
54%
102%
157%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Median Mean Bottom 90 90 to 95 95 to 99 99 to 99.9 99.9 to
99.99
Top 0.01
Per
cen
t G
row
th 1
98
2-2
011
Part of income distribution
Milligan: Inequality trends in Canada 11
Income concentration: driven by employment income
Source: Veall (2012)
46%
65%
34%
63%
27%
65%
34%
13%
32%
9%
20%
2%
20% 22%
34%28%
53%
34%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1946 2009 1946 2009 1946 2009
Top 1% Top 0.1% Top 0.01%
Sh
are
of
Inco
me
Wage Business Capital
Milligan: Inequality trends in Canada 12
Policy responses: Fight or Adapt?
What’s hurting the middle?
Trade, technology hurting routine, manual jobs. (David Autor, MIT)
Happening in US, UK, Canada, elsewhere.
Should we fight to reverse trade and technology?
Not sure it’s desirable: the engines of growth; brings great benefits.
Not possible: no time machine; cannot ‘uninvent’ the internet.
Instead, focus should be to adapt to the world we have.
Milligan: Inequality trends in Canada 13
Policy option #1: Raise high tax bracket rates
Milligan: Inequality trends in Canada 14
Policy option #1: Raise high tax bracket rates
Top rates in each province (2014). Remember: federal top rate is 29%...
Milligan: Inequality trends in Canada 15
Policy option #1: Raise high tax bracket rates
Evidence:
Higher earners don’t work less; not very likely to move.
High earners are likely to talk to their accountants and shift income
o Should we assume those with access to best tax advice fail to heed it?
Example: Moving top federal bracket from 29% to 35%
‘no response’ revenue estimate is $3B.
But if some income leaks away, this would be cut by half.
2013-14 federal spending budgeted at $282.6B.
o $3B wouldn’t go very far at all in compensating middle for lack of growth.
Milligan: Inequality trends in Canada 16
Policy option #2: Tighten the tax base
Rather than raise rates, tighten the definition of taxable income by closing loopholes.
Possibly more widespread appeal—people paying their ‘fair share’.
For federal government, constant ‘whack-a-mole’ with tax planning industry.
Two examples:
Alberta Family Trust allows income to shift to a trust resident in Alberta.
Favourable taxation of stock options.
Milligan: Inequality trends in Canada 17
Policy option #3: Reverse Unionization Slide
Unionization in Canada has fallen (although not as much as US)
Mostly driven by private sector declines.
Men
30.8
Women
31.6
Men private
21.7
Men public
72.9
Women private
13.5
Women public
74.9
0
10
20
30
40
50
60
70
80
90
1980 1985 1990 1995 2000 2005 2010
Pro
po
rtio
n o
f em
plo
yee
s i
n u
nio
n j
ob
s
Year
Unionization 1980-2012
Source:
CANSIM 279-0025
CANSIM 282-0078
2010 values
Milligan: Inequality trends in Canada 18
Policy option #4: Corporate governance
Much of the action at the very top is driven by executive compensation.
A board of directors is choosing to pay these employees well.
Are shareholders getting a good deal?
Randall Morck (U o fAlberta):
“…shareholder democracy in Canada is remarkably stunted compared to that in the
United States and United Kingdom…”
Caveats:
Cutting executive pay would benefit shareholders. Not clear this gives big shift to
income distribution.
If executive pay pressure is driven by US, Canada may suffer from unilateral
action. How to recruit the best executives here?
Milligan: Inequality trends in Canada 19
Policy option #5: Education
Returns to education continue to be very high—and growing.
Raw BA-High School wage gap of 40% in 2005; 32% in 1980 (Boudarbat,
Lemieux Riddell 2010)
The ‘education bubble’ or ‘BA-rista’ glut story is pervasive in news coverage.
o 25 year olds may have it tough—my hunch is media should interview more 40
year olds with BA vs High School….
Not exclusively about producing more university graduates
Personal services, cognitive non-routine.
Trades, improving HS completion.
Archetype of a job that will not be outsourced: plumbers.
Milligan: Inequality trends in Canada 20
Summary
Are things really so bad?
Bottom end is not getting worse.
Median incomes growing for last 15 years.
Large, fundamental shifts in labour market can’t be ignored:
Polarization of labour demand.
Concentration of income at top.
Not all ‘dark clouds’! Demand for non-routine, cognitive, creative labour remains
strong
Best policy options:
Tax base tightening
Corporate governance
Education
Milligan: Inequality trends in Canada 21
References Autor, David (2010) “The Polarization on Job Opportunities in the US Labor Market: Implications for Employment and
Earnings,” Center for American Progress and The Hamilton Project. [link]
Brahim Bodarbat & Thomas Lemieux & W. Craig Riddell (2010), “The Evolution of the Returns to Human Capital in Canada,
1980-2005,” Canadian Public Policy, Vol. 36, No. 1, pp. 63-89. [link]
Fortin, Nicole, David A. Green, Thomas Lemieux, Kevin Milligan, W. Craig Riddell (2012), “Canadian Inequality: Recent
Developments and Policy Options” Canadian Public Policy, Vol. 38, No. 2, pp. 121-145. [link]
Frenette, Marc, David A. Green, and Kevin Milligan (2009), "Taxes, Transfers, and Canadian Income Inequality" Canadian
Public Policy, Vol. 35, No. 4, pp. 389-411. [link]
Frenette, Marc, David A. Green, and Kevin Milligan (2009), " The tale of the tails: Canadian Income Inequality in the 1980s
and 1990s," Canadian Journal of Economics, Vol. 40, No. 3, pp. 734-764. [link]
Milligan, Kevin (2013) “Income Inequality and Income Taxation in Canada: Trends in the Census 1980-2005” University of
Calgary School of Public Policy Research Paper Volume 6, No. 24. [link]
Morck, Randall (2010), “Shareholder Democracy in Canada,” University of Alberta School of Business. [link]
Saez, Emmanuel, Joel Slemrod, and Seth H. Giertz (2012), “The Elasticity of Taxable Income with Respect to Marginal Tax
Rates: A Critical Review,” Journal of Economic Literature, Vol. 50, No. 1, pp. 3-50. [link]
Veall, Michael R. (2012), “Top income shares in Canada: Recent trends and policy implications,” Canadian Journal of
Economics, Vol. 45, No. 4, pp. 1247-1272. [link]
