My article, “It’s time to tackle inequality and poverty in Canada”, pointed out that between 2000 and 2014 market and disposable income inequality declined slightly in Canada, poverty rates for the non-elderly fell significantly and all parts of the income distribution experienced substantial real gains in disposable income with the poorest tenth posting the largest percentage gain. All these results reversed the trends in these indicators between 1990 and 2000.
This article will attempt to briefly explain what caused this reversal. A final article will draw out the policy implications for future efforts to reduce income inequality and poverty.
I begin by identifying some key factors which contributed to the rising levels of inequality and poverty among the non-elderly in the 1990’s. Those under age 65 at the bottom of the income distribution depend on Social Assistance (SA) and Employment Insurance (EI) to maintain their incomes when they are unable to find paid work or if their paid work is interrupted by unemployment.
Between 1990 and 2000 the population aged 25-64 increased by 13.9%. But total inflation-adjusted benefits received by them from SA and EI fell by 14.2%. A third major program important for this group- the real hourly minimum wages set by provincial and territorial governments increased more than inflation in most provinces. But the share of males 25-64 with any earnings fell from 89.9% to 87.6% and male real median earned incomes fell for the 35-44, the 45-54 and the 55-64 age groups. Given these conditions it is little wonder that income inequality and poverty among the non-elderly rose during this period and that disposable household incomes in the bottom half of the income distribution either fell or grew much less than for those at the top.
Contrast this with what happened between 2000 and 2014. Real benefits from SA and EI both rose. And steady incremental increases in real income-tested child benefits and the introduction of a refundable Working Income Tax Benefit (WITB) resulted in a 36.3% increase in total transfers to a 25-64 population which increased by only 16.3%. After 2004 real minimum hourly wages also increased by at least 16.2% in every province other than British Columbia with gains equalling or exceeding 25.5% in eight of the ten provinces. The share of males 25-64 with employment income held steady at 87.6% and male real median earnings increased in the 35-44, 45-54 and 55-64 age groups. Real median female earnings increased by at least 18% in all three of these age groups and the share of women aged 25-64 with earnings rose from 75.4% to 78.8%.
In short, whereas in the 1990’s governments of all political stripes had cut important benefits to the poor and the bottom half of the income distribution, after 2000 they substantially increased them. Moreover, they delivered a larger share of those benefits in the form of income-tested refundable tax credits. Unlike increased welfare payments these present no disincentive to earn and, in the case of the WITB actually provide an incentive to take low-paying jobs. The incentive to take entry-level jobs was further buttressed by substantial real increases in minimum wages in almost every province. The result was lower income inequality, lower poverty rates, particularly for children and substantial real increases in disposable incomes in the bottom half of the income distribution.
The implications of this analysis for future policy initiatives to address income inequality and poverty and to improve real incomes for the bottom 50% of the population will be examined in detail in the final instalment in this series next week.