Changes in the family life course are the main cause
by John Myles
Up to the late 1990s, a certain smugness was evident in studies of Canadian income inequality. While an upward trend in inequality was evident in the United States and Britain by the 1980s, any signs of rising income inequality in Canada appeared to be offset by the welfare state. Taxes and transfers were doing their job. Canadians might not be as kind and gentle as the Swedes but we were certainly kinder and gentler than those nasty Americans or the increasingly unlovely Brits.
However, it turned out that Canada was not different from the United States and Britain, just a little behind. In the latter half of the 1990s, income inequality in Canada surged upward after four decades of relative stability. This surge in inequality is especially disturbing because it occurred during a period of economic expansion when, if anything, we should expect inequality to decline. A reasonable expectation given its cyclical nature was that by 2003 or so our Gini index of inequality would have fallen back to 1989 levels, just under 0.28. Instead, it was close to 0.32.
When inequality or poverty measures change significantly, there are always three likely suspects to account for the shift: changes in labour markets (e.g. rising earnings inequality), changes in families (e.g. more lone parents) and changes in public policies (cuts to the “welfare state”).
Given the timing of the inequality surge, it is tempting to point the finger at the welfare state. The latter half of the 1990s was the period when Unemployment Insurance (UI) became Employment Insurance (EI) and access to benefits became more restrictive. Social assistance benefits were overhauled in a number of provinces, especially Alberta, British Columbia and Ontario. And federal and provincial surtaxes on high-income earners were abandoned.
As it turns out, however, these efforts at welfare state “retrenchment” constitute a small part of the story. Two recent studies of the effect of taxes and transfers on this trend tell much the same story,1 and the answer is not as simple as one might suspect.
The redistributive impact of taxes and transfers on income inequality has actually risen, not fallen, over the past two decades. So despite the retrenchment efforts of the 1990s, the welfare state has not been withering away. However, it has not been keeping pace with the changes in labour markets and families that are driving the surge. During the 1980s, the increase in the redistributive effect of taxes and transfers more than offset the increase in inequality due to changes in labour markets and families. By contrast, between 1989 and 2004, the increase in the redistributive effect offset less than a quarter of the increase due to changes in labour markets and families.