Embrace Inequality, one of the Key Drivers of Economic and Human Progress

Essay, Economy, Ian Madsen

In recent months and years, a plethora of social, cultural, academic and political critics and self-appointed ‘activists’ have all decried the supposed increase in income and wealth inequality in Western nations, particularly the United States of America. The first question to be asked is, is this true? The second is, if true, what is wrong with inequality in and of itself?

According to the US Census Bureau, inequality rose for the American public in 2018 versus 2017, the latest years for which data are available. Using the Gini coefficient, which is on a scale of 0 for absolute equality among all households, to one, where one household has all the income, the US figures were 0.485 in 2018, a slight increase from 0.482 in the prior year, and also up from 0.464 in 2006, at the economic peak in the previous expansion before the Financial Crisis of 2007-9.1 

In Canada, the situation is a little different. According to the Conference Board, income inequality is less than in the United States and has not appreciably changed over the past several years, staying around a Gini value of 0.32, although it increased substantially in the 1990s. Dividing the population into five equally populated quintiles, the lowest income quintile earned 7.3% of all after-tax national income in 2010, with the highest income quintile receiving 39.1%.2 

In the years since the Financial Crisis, wage growth was rather weak in both Canada and the United States, although stronger in the latter, as commodity price declines in 2014 and thereafter made wage increases in businesses dependent on those commodities more subdued, at best.3 

Since then, while the richest people have seen their incomes rise, so have the poorest, as unemployment levels sunk to record lows just ahead of the COVID-19 crash. Part-time, casual and unskilled workers have seen their incomes rise faster than those of higher-skilled and more educated, higher-income workers. In June of 2019, wage growth in Canada hit 3.8%.4 

Some of the improvement in lower-wage workers’ incomes is harder to isolate; it is often from those part-time workers getting full-time jobs, and from those not counted in the labour force actually entering it and getting a foothold in paid work; i.e., an increase in the labour participation rate, which hit a high of 87% in the prime 25-54 working-age category in Canada in 2019. New or renewed entrants may start out at a low wage, which can depress the average, even if the actual effect on those new entrants gaining employment and receiving cash for hours worked is for them, personally, very positive to their standard of living.5 

 In the United States, where the economic expansion has been stronger, lowest earners had the biggest increases in 2019, with those in the bottom quartile receiving an average 4.5% boost in November, and the top quartile only a 2.9% raise.

Wealth inequality is another problem.7 Where the poorest half of Canadians only own 4.5% of the nation’s wealth, net of their debts, while the richest half own the remainder. However, much of that wealth is tied up in their family homes, according to data from Statscan. 8 

Poverty levels have declined markedly in both nations, which is another indication that the lowest-income people in North America are experiencing higher incomes and higher standards of living. There is contention about how to measure poverty in the United States.9 By the conventional measure, it hit 11.8% in 2018,10 and was much lower using the consumption method (what people actually spend to maintain life at a basic sufficient level), which was under five percent in 2017.11

In Canada, the poverty rate dropped dramatically, from 12% in 2015 to 8.7% in 2018. Edmonton had the lowest, at 5.4%, Toronto the highest at 11.3%, which likely indicates the cost of living, particularly housing costs and rent, are a major factor in actual, realized poverty as experienced by low-income people, since rent or mortgage payments are the single largest expenditure by most people.12

Finally, social mobility, the probability that a child born into the lowest decile of income will rise to enjoy being in the top half of incomes eventually, has remained strong, calculated in a 2016 MacDonald-Laurier Institute study at 38% in Canada, versus 16% of being stuck at the bottom. The comparable figures for the United States were 29% and 22%, respectively.13 

So, if wages are finally increasing substantially, poverty levels are declining and social mobility is strong, it is reasonable to ask if inequality is an actual problem. After all, unless everyone receives exactly the same salary and investment and rental income, there will be, by definition, differences, and, thus unequal final income per person or household. Also, if some people are able to spend less, save more and invest their savings more shrewdly, they will have higher interest, dividend, capital gains or rental income. Similarly, if they are able to start a business on the side, or full time, and accrue additional income above their previous wages. 

There remains the problem of unequal schooling and educational attainment, which can be alleviated by a better quality of intervention in the primary and secondary school years, and more commercially attuned choices in post-secondary education. Careers in the arts, retail accommodation and food services are not as remunerative at those in the so-called ‘STEM’ fields, or in skilled trades and technical vocations.14 

Personal choices and bad fortune play a role, in serious illnesses or disabilities, substance addiction or criminal convictions. People with these aspects have harder times finding or keeping a good job and escaping poverty. There is also data suggesting that aboriginal people and recent immigrants have higher levels of poverty. When there are major social factors influencing poverty and other quality of life such as health and life expectancy, urgent government action may be needed. These issues are only tangentially related to what those decrying ‘inequality’ are pointing to.

Since inequality has been shown to not, unequivocally, be a problem, what possible benefit might it have? As there are a significant number of people with income surplus to their needs, they have an array of choices of how to use it. They can spend on themselves or their family members more lavishly, or they can donate to charities of their choice more generously. Either decision will result in more money going into the economy, and, eventually, into the hands of wage-earners, some of them low-income or low-skill.

More affluent people can also make provision for their later retirement by saving and investing.  Savings go into financial institutions which, in turn, lend it out or invest it, financing operations and capital improvements of small or large businesses, or home purchases or residential building, housing more people, some of them of modest means.

Finally, they can invest the money in actual businesses, either in the form of equity or debt securities which may be publicly listed or traded, or in venture capital, private equity or pooled hedge or other investment funds, which, in turn, invest in the entrepreneurial enterprises of tomorrow, enabling commercialization of innovative science and technology, and the employment of more middle- and lower-income people of many different occupations, some of them in support or supplier industries. Many new jobs come from relatively new companies indirectly; the multiplier effect can be as much as a factor of five, according to a Sloan Review study.15

All of the successful businesses which built, grew, transformed and enriched the Western developed nations of the past four hundred years were funded with surplus money from affluent individuals who were gambling on their own and their target companies’ mercantile and technical acumen.

Without inequality, there would be little or no surplus money to invest in the small and larger businesses that will eventually employ everyone as older ones gradually decline. Inequality is a key driver, if not outright essential, for economic progress and improved living standards. 

Bringing rich people down with higher taxes on income or wealth will not, in the long run, improve overall quality of life. The Scandinavian countries that tried to do that ended up drastically lowering their income and wealth taxes.

Bringing about conditions that enhance the quality of the workforce and broaden and deepen the commercial and investment opportunities for everyone will ultimately enrich the population, lower poverty levels further, improve social mobility and make inequality measures an irrelevant notion. These may be more challenging tasks than simply hiking taxes on a small minority of voters, but they can have a big payoff.

 

Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.