Here's how the rich-poor gap grew
BRUCE LITTLE, Toronto Globe and Mail
Monday, June 19, 2000
Corrado Gini's contribution to science got another workout in Canada last
week. Thanks to him, we know for sure that income inequality grew during
the 1990s. We know the market further
divided people along income lines with growing force and we know that
governments stopped fighting the trend as hard as they once did.
Gini was an Italian statistician who devised the most commonly used
calculation of income distribution among whole opulations. And his
measure, the Gini coefficient, finds a
prominent place in Canada every time Ottawa churns out new data on family
income, as it did last week.
The good news was not so much that average family income after taxes hit
its highest level ever in 1998 at $49,626, but that it finally exceeded the
previous peak in 1989 after eight years of decline and achingly slow recovery.
The bad news was that income grew more unequally distributed during the
decade. One advantage of the Gini coefficient is that it covers what's
happened to everyone, not just those at
the top (who did better) and the bottom (who did worse). Better yet, one
can apply it to three different versions of income, so it tells us both how
the market economy is treating people and how governments are using their
power to spend and tax to take from the better-off and give
to the worse-off.
The basic measure is market income, which is the wages and salaries people
get from their jobs, including retirement pensions, and the interest and
dividends they earn on their savings.
Governments redistribute income in two ways. They transfer money to people
(through welfare, employment insurance, pensions for the elderly) so that
their total income is higher than
their market income. And governments tax high-income earners more heavily
than low-income earners. So when we get to after-tax income,
the amount left over for people to spend or save, the gap between those at
the top and those at the bottom is smaller
than it was at the start.
So what does Corrado Gini have to tell us about Canada in the 1990s?
Crudely put, the rich got richer and the poor got poorer, not in the first
half of the decade, when you might have expected the recession to deliver
a setback, but in the years from 1994 to 1998, when the economy got rolling
again.
Here's how the numbers work. In the Gini measure, a reading of 0 represents
perfect equality (everyone has the same income) and 1 repesents perfect
inequality (one person gets all the
income, the rest get nothing).
In 1989, the Gini was .396 for market income. Transfers reduced it to .329
for total income and taxes pushed it down further to .292, which is roughly
where it had been for the previous 20
years. Government action, in effect, pushed the distribution toward greater
equality by .104 points on the Gini scale.
By 1994, the market income Gini had risen to .424, an increase of 7.1 per
cent, while the Gini for total income climbed to .334, up only 1.5 per
cent. Employment insurance payments and
welfare benefits had both increased during the recession, blunting the
effect of what the market was doing to incomes. At the same time, the Gini
for after-tax income remained steady at .292.
The impact of the transfer and tax systems on income distribution was worth
.132 points on the Gini scale. In effect, governments were doing more in
1994 than in 1989 to offset the effect of market forces. As unemployment
rose, so did EI payments; and as more families fell into straitened
circumstances, governments paid more in welfare to those who couldn't make
it through tough times on their own.
Now take a look at 1998, the latest year for which we have figures. The
market income Gini was now up to .437, up another 3.1 per cent from 1994.
One reason is that the job market was
increasingly favouring those with good education and valuable skills; those
with neither, even if they had a job, had to settle for less.
At the same time, the transfer and tax systems were doing less to offset
this trend. The Gini for total income was up 6.9 per cent to .357 and the
Gini for after-tax income was up 7.9 per
cent to .315, its highest level in the 28 years Statscan has been making
these calculations. Government action shaved only .122 points off the Gini
scale, down from 1994, but higher than 1989.
An improving job market explains part of that drop. The economy created
only 124,000 jobs from 1989 to 1994, but more than one million jobs from
1994 to 1998. That alone would account for a
decline in EI payments and welfare benefits; many recipients simply got
jobs that allowed them to get off EI or welfare.
But the rest of the drop resulted from deliberate changes to government
policies designed to redistribute less income than before. Ottawa made it
harder for some people to get EI and reduced payments to those who did.
And many provinces – notably Ontario and Alberta -- restricted access to
welfare and cut benefits to those who still qualified.
Market forces are the main reason for less income equality in 1998 than in
1994. But there's little question that changing government policies after
1994 played a role as well.
Amazing Facts appears every Monday. Bruce Little may be reached by E-mail
([log in to unmask]).
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Dennis Raphael, Ph.D.
Associate Professor
Department of Public Health Sciences
Graduate Department of Community Health
University of Toronto
McMurrich Building, Room 101
Toronto, Ontario, CANADA M5S 1A8
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