Trends in income inequality

IRPP-CLSRN Conference: Inequality in Canada: Driving Forces, Outcomes and Policy, Ottawa, Feb. 24, 2014

Andrew Heisz Income Statistics Division, Statistics Canada

Trends in Income Inequality Overview of Canadian Trends Relative to Other OECD

Countries

2/24/2014 Statistics Canada • Statistique Canada 2

How we measure income inequality §  Concentration of income between particular quantiles of the income distribution

•  Strengths – easy to communicate •  Weaknesses – do not respond to changes in inequalities at all points of the

income distribution

§  GINI coefficients: a widely used index that ranges between 0 and 1, with 0 indicating complete equality, and 1 indicating complete inequality

•  Strengths – responds to all changes in the distribution of income •  Weaknesses – tends to respond more to changes in the “middle” of the income

distribution, so may miss emerging trends in high or low incomes. (Trends in the top 1% of earners are not well captured by the GINI.)

§  Low income statistics: measure the concentration of the population in the bottom of the income distribution.

§  Best approach is to examine inequality using several indicators


The share of income held by the top quintile rose from 36.7% in the 1980s and 1990s to 39.0% in the 2000s*

35

36

37

38

39

40

1976

1981

1986

1991

1996

2001

2006

2011

Perc

ent o

f inc

ome

held

in th

e to

p qu

intil

e

**income is measured on an after-tax, adult equivalent adjusted basis Source: Statistics Canada (CANSIM table 202-0707)

average, 1976-1995= 36.7%

average, 2000-2011= 39.0%


Lowest quin,le

Middle quin,le

Highest quin,le

% of income held in the top

quin,le Economic family, a<er-‐tax, adult

equivalent adjusted income ($2011)*

1989 $14,300 $31,700 $63,400 36.3

2011 $15,400 $37,500 $83,500 38.8

growth 8% 18% 32% *Source: Sta,s,cs Canada (CANSIM table 202-‐0707)

After-tax income rose both at the bottom and top of the income distribution; more at the middle and top


Income inequality rose in most OECD countries

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

0.400

0.450

0.500

GIN

I Coe

ffici

ent

2008

1985

Based on adult equivalent adjusted household after-tax income Source: OECD Database on Household Income Distribution and Poverty.


Income inequality also grew in provinces*

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

GIN

I coe

ffici

ent

average, 2007-11

average, 1985-89

*Income is measured on a household after-tax, adult equivalent adjusted basis, data is averaged over 5 years to reduce noise in the estimates due to sampling error introduced by the smaller provincial samples Source: Statistics Canada (CANSIM table 202-0709)


The share of personal income held by the top 1% of income earners grew to more than 10% in the 2000s*

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7

8

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12

13

14

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Income share for top 1% of total income

* Income is measured on a personal pre-tax basis Note: The income threshold to enter the top 1% was $209,600 in 2011. Source: Statistics Canada, Longitudinal Administrative Databank


Canada and the US had fairly similar concentrations of personal income in the top 1% up to around 1980. After 1980, both countries saw an increase in the concentration of income in the top 1%, but the increase was faster in the US *

0

5

10

15

20

25

1900 1920 1940 1960 1980 2000 2020

Canada-Top 1% income share

Canada-Top 1% income share-LAD

United States-Top 1% income share

*Source, The World Top Incomes Database, http://g-mond.parisschoolofeconomics.eu/topincomes/

Inco

me

shar

e (%

)


The rise in after-tax inequality is underpinned by a rise in market income inequality. Income redistribution from government transfers and taxes reduces income inequality*

0.200

0.250

0.300

0.350

0.400

0.450

0.500

1976

1981

1986

1991

1996

2001

2006

2011

GIN

I coe

ffici

ent

Year

Market income

After-tax income

*income is measured on a household after-tax, adult equivalent basis Source: Statistics Canada (CANSIM table 202-0709)


Low income trends §  Low income is not the same as inequality – it is possible to have rising

inequality in times of falling low-income rates.

§  We use two types of low income measures.

§  LICO measures tell us what share of the population falls below a fixed threshold (updated only for changes in the CPI). It tells us how population groups are doing in an absolute sense.

§  LIM measures are most closely related to the inequality measure – they measure what share of the population falls below 50% of the median of any income measure for any given year. It tells how population groups are doing in a relative sense.

•  Relative low income will rise when income growth at the bottom of the income distribution is less than income growth at the median. This is consistent with rising inequality.


Source: CANSIM 202-0802

1.  Low income measured against a fixed threshold (LICO) fell, indicating a rise in income at the bottom of the distribution. However, relative low income (LIM) remained steady, reflecting no gains relative to the median.

2.  These results are consistent with those that showed an increase in income in the lowest quintile, but these increases were slower than at the middle of the distribution.

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15

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1976

1981

1986

1991

1996

2001

2006

2011

% lo

w in

com

e

Low income cut-offs after tax, 1992 base

Low income measure after tax

2/24/2014 Statistics Canada • Statistique Canada 12 Source: Statistics Canada, CANSIM table 202-0806

1.  Under either measure, about a third of those in low income in one year have exited by the next.

2.  Comparing two years in sequence, the share of persons exiting absolute low-income rose over the period, but the share of those exiting relative low income remained steady.

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25

30

35

40

45

% o

f the

low

inco

me

popu

latio

n in

firs

t yea

r w

ho w

ere

not i

n lo

w in

com

e th

e se

cond

yea

r

LICO

LIM


Dynamics of income inequality With longitudinal data we can also describe how inequalities change over time.

•  Income mobility •  Describes the extent to which a person’s relative income standing changes over

time

•  Intergenerational Income mobility •  Describes the extent to which a person’s relative income standing differs from

their parents

A number of studies in recent years have shown that income mobility has declined in Canada and the US

§  Beach (Canada-2006) §  Bradbury (US-2011) §  Zhang et al (Canada-2014)


*Source: Xuelin Zhang, Jackson Chung and Habib Saani, 2014, “The Evolution of Income Mobility in Canada, 1982 to 2010”, Statistics Canada, forthcoming.

0%

10%

20%

30%

40%

50%

60%

70%

80%

Perc

ent m

ovin

g to

a h

ighe

r dec

ile

Measured over a 5-year period, the share of taxfilers who moved up from the lower deciles

has fallen, indicating less upward income mobility

Bottom decile

Second decile

Third decile

Fourth decile


Intergenerational income mobility is higher in Canada than the United States*

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

bottom 2 3 top earnings quartile of son (about two decades

later)

Father had bottom quartile earnings (in about 1980)

Canada

US

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

bottom 2 3 top earnings quartile of son (about two decades

later)

Father had top quartile earnings (in about 1980)

Canada

US

shar

e

Sources: Canada: Miles Corak and Andrew Heisz, 1999, The Intergenerational Earnings and Income Mobility of Canadian Men, Evidence from Longitudinal Income Tax Data, The Journal of Human Resources, Vol. 34, no. 3. Unites States: David J. Zimmerman, 1992, Regression towards Mediocrity in Economic Stature, American Economic Review, Vol. 82, No. 3.


Conclusion §  Income inequality has risen in Canada. A similar increase was seen in most OECD

countries and in provinces.

§  Underlying the rise in income inequality is an increase in family market income inequality. Income inequality is reduced through the tax and transfer system.

§  Studying low income statistics shows that while fewer people fall below the absolute LICO cut-off in recent years, relative low income has not declined. A significant fraction of low-income persons exit low income from one year to the next.

§  Income mobility in Canada has fallen over time.

§  Intergenerational income mobility is higher in Canada than the US.

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Trends in income inequality