Inequality, Canadian Style

The income gap hasn't widened

A common view is that rising income inequality is an unavoidable price that the U.S. has had to pay to thrive in a global economy characterized by strong competition and shifting technology. Since the same winds of change have affected Canada, which is highly integrated with the U.S. economy, one might think that the same trend toward inequality would have surfaced there--even though Canada has always been more egalitarian. One might also assume that attempts to resist that trend would harm Canadian living standards.

Judging by a study in the Monthly Labor Review by Michael C. Wolfson and Brian B. Murphy of Statistics Canada, however, such assumptions appear decidedly premature--at least till now. The researchers confirm that gross domestic product per capita grew a bit faster in the U.S. than in Canada from 1970 to 1995. But they find that many Canadian families in 1995 still enjoyed higher disposable incomes in terms of absolute purchasing power than their U.S. counterparts (chart). And trends toward inequality in Canada have either been muted or failed to develop.

While U.S. workers earn more on average than Canadians, for example, the trends in earnings inequality--as measured by the gap between the top and bottom 20% of earners--have diverged. From 1974 to 1985, wage inequality increased in both nations. From 1985 to 1995, however, it narrowed slightly in Canada but continued to widen in the U.S., where the top 10% of workers reaped hefty pay gains.

Interestingly, even as this occurred, the widely reported decline of the middle class was apparently arrested in both countries. The researchers report that the share of workers with pay in the middle range (within 25% of the median) actually rose between 1985 and 1995, after falling in the decade before.

The real story, however, is the stark contrast in what has been happening to aftertax family incomes compared with individual wages. Both countries have sought to cut taxes and social-welfare spending, but the study shows that family-income inequality in Canada declined from 1974 to 1995. In the U.S., meanwhile, it grew more pronounced.

In particular, real disposable incomes of the bottom 10% of families improved appreciably in Canada and deteriorated in the U.S. At the same time, incomes of the top 10% of families have surged in the U.S. and lagged in Canada.

Moreover, a sizable share of Canadian families have been holding their own economically. Although the average family income in purchasing power terms is higher in the U.S., close to half of Canadian families in 1995 (the bottom half in the income spectrum) still came out ahead of their counterparts to the south. And that's not counting the medical benefits Canadians receive from a publicly funded health-care system--benefits for which many American families have to fork over big bucks.