Canada’s Poor Outdo the Rich for Income Growth

By: Rebeca Morla - @RebecaMorla - Apr 20, 2015, 5:40 am

English “The rich are getting richer, and the poor are getting poorer” goes the oft-heard cry, but a yet-to-be released study from the Fraser Institute turns conventional wisdom on its head with regard to income distribution in Canada.

The 88-page report, “Income Distribution, Income Mobility, and the Super-Rich in Canada” — presented at a private conference and shared with the PanAm Post — is based on data primarily collected by Statistics Canada and is written by Herbert Grubel, an economics professor emeritus at Simon Fraser University.

The results are striking. Not only were significant numbers of Canada’s poorest able to escape the lowest income bracket between 1991 and 2011, the least well-paid saw their paychecks increase by 280 percent, far outstripping the income growth of middle- and high-income earners.

With a backdrop of significant 1990s privatization and deficit-cutting, the claim that Canada’s richest are getting wealthier at the expense of the poor appears counter to the evidence. Grubel, a senior fellow at the Fraser Institute in Vancouver, British Columbia, and former member of parliament, wants this data aired so people can better assess the effects of equalization policies and whether there is a need for them in Canada.

The Poor Are Not Poorer

Part of Grubel’s research focuses on the distribution of income, and draws on common indices of equality, such as the Gini coefficient and the ratio of average incomes of the highest quintile versus the lowest. He then compares two data periods: the first, between 1976 and 1996, and the second, between 1999 and 2011.

In the first period, the Canadian federal government adopted policies with the stated goal of making incomes more equal across the population, such as more generous unemployment insurance. However, Statistics Canada data suggests not only that these policies failed to equalize incomes, they heralded an era of stagnation for the incomes of the rich, middle class, and poor alike.

In the lead up to the second period, Canada shifted her policies to eliminate unsustainable fiscal deficits. The nation’s legislators opted to deregulate and privatize industries, measures which “were widely expected to increase the inequality of incomes,” Grubel writes.

Gini coefficients for Canada between 1976 and 2011. (Herbert Grubel)
Canada’s Gini coefficient, a measure of income equality, has been markedly higher in recent years, compared with the 1970s and 1980s. (Herbert Grubel)

Instead, the opposite transpired, and equality increased (pictured). Not only did incomes rise across the board, the poorest individuals’ saw the swiftest rises, and a significant number were able to join the ranks of the highest-paid. Canadians who were in the lowest quintile in 1990, with an average income of US$19,000, saw an increase of 280 percent, earning up to $54,000 by 2009. During the same period, those who started out with incomes in the middle and highest quintiles saw increases of 151 percent and 112 percent, respectively.

“These results are especially remarkable,” according to Grubel, “because during the 19 years under consideration, the federal government in the 1990s engaged in drastic spending cuts, and the recessions in 2001 and in 2008 had serious negative effects on employment and economic growth.”

Income Mobility versus the “Poverty Trap”

In the second chapter of the paper, Grubler deconstructs two popular beliefs in the discussion of inequality: that the poor are trapped in poverty, and that the incomes of the rich have been rising at the expense of stagnating lower-class incomes.

The author’s research instead suggests that there is no poverty trap, and that income mobility is very high for Canadians. Between 2003 and 2004 alone, 22.3 percent of Canadians who were in the lowest quintile moved into higher quintiles.

Moreover, “19.8 percent of the highest income earners in 2003 had moved to lower quintiles in 2004, and individuals in the other quintiles also experienced lower incomes,” Grubler observes. In other words, the poorest were able to dramatically improve their situation within one year, while others were far from locked into their high-earning positions.

Income mobility through quintiles over 19 years. (Herbert Grubler)
Income mobility per quintile over 19 years. (Herbert Grubel)

When analyzing mobility over 19 years — 1990 to 2009 — the data shows that only 13 percent of people who were in the lowest quintile in 1990 remained in the same category 19 years later: “The rest had in almost equal proportions moved into each of the four higher quintiles, including the top one.”

Furthermore, Grubel points out that downward mobility was also significant, with only 64 percent of those who were in the top quintile in 1990 remained in it in 2009.

Growth in real income of Canadians over 19 years, who in 1990 had incomes in the different quintiles. The table translates into an average non-compound annual rate of growth equal to 7 percent. (Herbert Grubel)
Growth in real income of Canadians over 19 years. The table translates into an average non-compound annual rate of growth equal to 7 percent. (Herbert Grubel)

Grubel thus demonstrates that wealthy Canadians have not become richer at the expense of middle class and low-income earners as a whole.

According to the former legislator, these results vary from those of the traditional surveys of income, because the latter ignore the changes in the composition of income quintiles.

In an interview with Chilean outlet Pulso, Grubel explained that the problem with measuring income inequality is that statistics are usually collected by governments, which only consider the distribution of income in a given year.

“The problem is that this shows that people who were poor in 1990, remain poor in 2009. It turns out that the people who are considered poor in 2009 [are] totally different from those who were considered poor in 1990.”

“What happened to people who are not poor anymore? They had higher incomes. Only 13 percent remained poor in 2009. The remaining 87 percent had become richer. The reasons are varied, but they were only temporarily poor. Therefore, it’s misleading to say that the poor remain poor, and the rich have become richer,” Grubel concludes.

Edited by Fergus Hodgson and Laurie Blair.

Rebeca Morla Rebeca Morla

Based in Guayaquil, Ecuador, Rebeca Morla works as an editorial assistant with the PanAm Post. She is a political scientist and an Executive Board member of EsLibertad. Follow @RebecaMorla.