Review Paper; Canada Income Inequality
The contemporary labor market around the world has undergone remarkable changes over the past decades. One of the notable changes relates to increase in labor supply and demand. Nevertheless, the labor market has been characterized by cases of income inequality. One of the fundamental macroeconomic roles that governments are required to ensure entails promotion of equitable income distribution within a country. This paper entails a review of the article titled ‘Canadian inequality; recent developments and policy options’ by Nicole Fortin, David A. Green, Thomas Lemieux, Kevin Milligan and W. Craig Riddell.
The article identifies income inequality as a major problem that has persisted in Canada over the past three decades. The problem has been spurred by different factors. One of the factors entails ineffective government policies with reference to taxes and transfers. The authors note that income inequality during the 1980s in Canada was substantially low due to the presence of government transfers that bridged the gap amongst the citizens’ disposable income. However, the elimination of the transfer payments and the subsequent increase in taxes increased income inequality from the 1990s. This view is supported by Ryscavage (2015) who affirms that ‘income inequality rises sharply once government cash transfer payments are eliminated’ (p.71). The lack of political will in Canada to adjust policies on transfers and taxes as a fiscal tools for reducing or eliminating income inequality has the problem to be persistent.
Despite the fact that education is identified as one of the most effective tools to eliminate income inequality, the prevalence of income inequality has widened the education gap between the high and the low income earners in Canada. The authors affirm that the income gap between men who had bachelor’s degree and those with high school diploma increased from 32% to 40% between 1980 and 2005 ().
The level of income inequality has further been increased by age gap. The economic recession experienced during the 1980s and early 1990s reduced the number of entrants. However, income level for the new entrants during the 1990s was 20% lower compared to the level in 1980s. The situation is likely to worsen in the future due to the dynamics in the contemporary labor market.
Developments in technological innovation have also contributed to growth in income inequality. Most Canadian organizations are increasingly implementing new technology in an effort to attain cost-efficiency. Therefore, the demand for technologically savvy employees has increased substantially. This caused an increase in income level for the professionals while the wage level for the less technologically savvy employees remains low. The demand for low skilled employees has reduced significantly in Canada. Heller and Chusseau (2013) posit that high demand for skilled employees increases their risk premium. Fortin et al (2012) posit that the increased computerization of the workplaces has led to polarization of the workforce. Fortin et al (212) affirm that women are the most disadvantaged with reference to technological expertise. Thus, the level of income inequality is Canada is substantially high. In the quest to reduce the cost of operation, most organizations in Canada are off-shoring/outsourcing the low-skilled production activities in countries characterized by low wages. Thus, the rate of unemployment amongst the less skilled is likely to be increased substantially.
The decline in the level of unionization in Canada during the 1980s and 1990s further explain the increase in the level income inequality. Mendleson (2011) affirms that unions play a critical role in bridging the gap between the rich and the poor through implementation of the collective bargaining agreement [CBA]. Moreover, the bargaining power inherent in unions spread to other non-unionized sectors. Craig Riddell, a renowned Labor Economist at the University of British Columbia, affirms that approximately 20% of the total growth in income inequality amongst Canadian men can be associated with decline in the level of unionization (Mendleson, 2011). This finding supports Fortin et al (2012) finding on the role of unions in promoting income equality. The graph below illustrates the level of unionization in Canada from 1980 to 2010.
Source: (Mendleson, 2011).
From the graph above, it is evident that union density in Canada has fluctuated significantly over the years. The level of unionization in Canada amongst women in Canada is substantially low, which has significantly contributed to reduction in their bargaining power.
The article identifies the increase in income inequality in Canada to be a controllable aspect. The authors affirm that it is possible for Canada to reduce the level of income inequality through various policy interventions such as adjustment in tax and transfer system. The authors identify reduction in tax on income and increase in transfer payment as one of the policy options. Nevertheless, it is important for the Canadian government to assess the cost implications of this approach. Improvement in the country’s education system is also critical in bridging the skills differentials. Moreover, Canada should create an environment conducive for establishment of unions. This will play an essential role in reducing income inequality in both the unionized and non-unionized sectors.
Fortin, N., Green, D., Lemiux, T., Milligan, K., & Riddell, C. (2012). ‘Canadian inequality;
recent developments and policy options’, Canadian Public Policy, 38(2), 122-143.
Hellier, J., & Chusseaau, N. (2013). Growing income inequalities; economic analysis. New
York: Palgrave Macmillan.
Mendleson, R. (2011). Canada income inequality and the decline of unions. Have we passed?
a point of no return? Retrieved March 12, 2016 from <http://www.huffingtonpost.ca/2011/12/12/canada-income-inequality-decline-unions-middle-class-jobs_n_1139136.html>
Ryscavage, P. (2015). Income inequality in America; an analysis of trends. New York: