Society

Income inequality is the extent to which income is distributed unevenly in a country. It is an important indicator of equity in an economy, and has implications for other social outcomes such as crime and social exclusion. 

Although the 17 peer countries are among the wealthiest in the world, the income per capita figure does not tell us how this income is distributed. Income inequality within countries is often masked by the national average.

In the last few years, income inequality has been in the media spotlight. There is widespread concern around the globe that the “rich are getting richer, and the poor are getting poorer.” For example, a recent study by Berkeley professor Emmanuel Saez found that “income inequality in the United States is at an all-time high, surpassing even levels seen during the Great Depression.”¹ He reports that the top 10 per cent of income earners in 2007 accounted for 49.7 per cent of total U.S. income—“a level higher than any other year since 1917 and even surpasses 1928, the peak of stock market bubble in the ‘roaring’ 1920s.”²

The Gini coefficient (named after the Italian statistician Corrado Gini) is the most commonly used measure of income inequality. It calculates the extent to which the distribution of income among individuals within a country deviates from a perfectly equal distribution. A Gini coefficient of 0 represents perfect equality (that is, every person in the society has the same amount of income); a Gini coefficient of 100 represents perfect inequality (that is, one person has all the income and the rest of the society has none).

Income inequality is higher in Canada than in 11 of the peer countries. Although Canada’s wealth is distributed more equally than in the U.S., Canada’s 12^th place ranking suggests it is doing a mediocre job of ensuring income equality. Canada gets a “C” grade on this indicator.

Denmark and Sweden, which have the lowest levels of poverty among children and their working-age populations, are also the clear leaders on the income inequality indicator. The relationship between social spending and poverty rates has become more obvious over time, so it is no surprise that these leading countries boast strong traditions of wealth distribution. Their success in maintaining low poverty rates is attributable to a universal welfare policy that has been effectively combined with job creation strategies that support gender equality and accessibility.

After improving to a “B” grade in the mid-1990s, Canada’s grade once again dropped to a “C” in the most recent decade. Canada is the only peer country whose relative grade dropped between the mid-1990s and the mid-2000s, owing to its significant increase in income inequality (the second-largest of all the peer countries). Finland had the largest increase, but income inequality there is still much lower than in most peer countries and so retains its “A.” Denmark, Finland, and Sweden have consistently been the leaders on this indicator, scoring “A” grades for each decade. The U.S. and Italy have been consistent “D” performers.

Statistics Canada recently released data on earnings and income from the 2006 Census revealing an increase in income inequality.³ Based on the median earnings of full-time, full-year earners between 1980 and 2005, the data show:

• earnings increased by 16.4 per cent for those in the top income group
• earnings stagnated for those in the middle income group
• earnings fell by 20.6 per cent for those in the bottom group

A similar pattern exists when the more recent period (2000—2005) is isolated:

• earnings increased by 6.2 per cent for the top group
• earnings increased by 2.4 per cent for the middle group
• earnings fell by 3.1 per cent for the bottom income group

Income inequality increased between the mid-1990s and the mid-2000s in 10 of the 17 peer countries. The OECD’s breakthrough study Growing Unequal? Income Distribution and Poverty in OECD Countries includes a list of factors that have driven changes in income inequality in OECD countries over time.

• “Changes in the structure of the population are one of the causes of higher inequality. However, this mainly reflects the rise in the number of single-adult households rather than population ageing per se.
• Earnings of full-time workers have become more unequal in most OECD countries. This is due to high earners becoming even more so. Globalisation, skill-biased technical change and labour market institutions and policies have all probably contributed to this outcome.
• Capital income and self-employment income are very unequally distributed, and have become even more so over the past decade. These trends are a major cause of wider income inequalities.”⁴

There is a wide variety of opinion on what is fair and just distribution of income. Economists have historically tended to assume that there is a trade-off between equality and efficiency—that redistribution of wealth comes ultimately at the expense of productivity.

Unfortunately, the results from the empirical research on the trade-off between income inequality and economic growth are inconclusive. 

Harvard University economist Robert Barro has argued that although higher inequality tends to “retard growth in poor countries,” it can actually “encourage growth in well developed regions.”⁵ The World Bank’s World Development Report, on the other hand, shows that inequality and growth are not related—concluding that inequality neither drives nor impairs growth.⁶

Concern over growing income gaps within and among countries is related to the idea that income inequality diminishes growth potential. It does this by undermining social cohesion, leading to increased social unrest and social conflict. However, as noted in a recent study on income inequality by the OECD, “A society in which income was distributed perfectly equally would not be a desirable place either. People who work harder, or are more talented than others, should have more income. What matters, in fact, is equality of opportunity, not equality of outcomes.”⁷

Still, a study by Michael Förster for the OECD highlights new research that shows a society should be concerned about income inequality: “A number of authors provide evidence that a poor distribution of income might ultimately negatively affect economic growth, through the channels of education, access to capital markets, as well as political and economic mechanisms.”⁸

The most recent World Values Survey asked people in 13 countries what they felt about income inequality.⁹ The responses could range from 1 (incomes should be made more equal) to 10 (we need larger income differences as incentives).

The mean response value in the U.S. was the highest among the countries participating in the survey. More than any other country, respondents in the U.S. felt that larger income inequality acts as an incentive. Switzerland was at the other end of the scale: Swiss respondents, more than those in any other country, felt that incomes should be made more equal. The average Canadian response was closer to that of the U.S. than that of Switzerland. Interestingly, the Swedish and U.S. average response rates are quite close with respondants in both countries leaning more towards saying that larger income differences are needed as economic incentives. This is an unexpected finding given that Sweden has the second most equal income distributions of the peer countries and the U.S. has the most unequal.

¹ Emmanuel Saez, Striking It Richer: The Evolution of Top Incomes in the United States (Update With 2007 Estimates). August 9, 2009, [online, cited September 4, 2009].

² Emmanuel Saez, Striking It Richer: The Evolution of Top Incomes in the United States (Update With 2007 Estimates). August 9, 2009, [online, cited September 4, 2009].

³ Statistics Canada, Earnings and Incomes of Canadians Over the Past Quarter Century, 2006 Census, Catalogue no. 97-563-X (Ottawa: Author, 2008).

⁴ OECD, Growing Unequal? Income Distribution and Poverty in OECD Countries. (Paris: Author, 2008), [online, cited September 4, 2009]. 

⁵ Robert Barro, Inequality and Growth in a Panel of Countries, Working Paper (June 1999) [online, cited September 9, 2009].

⁶ World Bank, World Development Report 2000/2001: Attacking Poverty (Washington: Author, 2000).

⁷ OECD, Growing Unequal? Income Distribution and Poverty in OECD Countries. (Paris: Author, 2008), [online, cited September 4, 2009]. 

⁸ Michael F. Förster, Trends and Driving Factors in Income Distribution and Poverty in the OECD Area, Labour Market and Social Policy—Occasional Paper No. 42 (Paris: OECD, August 2000), p. 10.

⁹ World Values Survey, Online Data Analysis. Website content. [online, cited September 4, 2009].

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Elderly Poverty	Burglaries
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Working-age Poverty	Life Satisfaction
Income Inequality	Acceptance of Diversity
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