The state and evolution of income distribution in Ontario

The state and evolution of income distribution in Ontario

Income inequality refers to an unequal distribution of income within a region whereby income groups receive disproportionately larger or smaller shares of total income relative to their representation in the population. Ontario, and by extension Canada, is generally considered a fair society, where income is equitably distributed when compared to other regions or countries.

According to one popular measure of income distribution, the Gini coefficient, income inequality has increased in Ontario since 1982, particularly during the 1990s, but has somewhat plateaued since 2000.[1] But the use of this indicator to measure inequality has been criticized by Miles Corak, an economist and expert on inequality and social mobility. Corak argues that the coefficient is insensitive to changes at the extreme ends of the income distribution (e.g. the rise in income of the top 1%). If that is the case, then how can we assess the state and evolution of income distribution in the province?

By considering the share of total income that each group represents overtime, we can more clearly observe how income and wealth are being distributed within Ontario. More importantly, by looking at the relative changes in these shares overtime, we can see the progression of income distribution, as well as understand which groups are accumulating more income at the expense of the others.

The Institute’s research shows that income distribution should be at the forefront of public policy debate in Ontario. Starting in the 1990s, income distribution patterns in the province started to diverge considerably from the somewhat stable numbers found in prior decades. This does not mean that before 1990s income was equitably distributed in the province, but that the patterns found in subsequent decades are concerning.

The top 20 percent of income earners, or the highest quintile, saw their share of total after-tax income increase by 8.4 percent relative to the 1990 level. Back then, this group held 40.6 percent of total income, and by 2011 that number increased to 44.0 percent. In the meantime, the lowest quintile, or bottom 20 percent, saw their share decline from 5.6 percent in 1990 to 4.6 percent in 2011 – a roughly 18 percent decrease. Analyzing the other quintiles we see that, apart from the top 20 percent of income earner, all of them saw their shares of total after-tax income decrease relative to the 1990 levels. This is concerning for two main reasons. First, one single group seems to be getting wealthier at the expense of all the others, particularly the lowest income group. And second, the measure of income used here is after-tax, which means it considers income distribution after government transfers provided by the tax system, already accounting for some equalization of income distribution.

Using a different dataset that provides a closer look at the top percentiles of income distribution, we see an even more concerning situation, one that indicators such as the Gini coefficient cannot track.[2] The top 10, 5, and 1 percent of income earners saw their shares of total after-tax income increase by 14.4, 17.9, and 24.7 percent, respectively, between 1990 and 2011. In contrast, the bottom 50 percent of income earners in the province saw their share decline by 17 percent. This rapid wealth accumulation by the top percentiles, coupled with the declines observed for the bottom 50 percent and the lowest quintile, suggest that Ontario’s society is becoming alarmingly polarized.

Although it is true that the average income across all income groups has increased over time (in real terms), the distribution has deteriorated and the accumulation of wealth has been far from equitable. But, why should we care about income distribution?

Harvard philosopher, T. M. Scanlon, offered four major reasons why we should care about income distribution and economic inequality: inequality can give wealthier people an unacceptable degree of control over the lives of others; it can undermine the fairness of political institutions; it undermines the fairness of the economic system itself; and workers, as participants in a scheme of cooperation that produces national income, have a claim to a fair share of what they have helped to produce.

The third reason, the fairness of the economic system itself, is particularly important in the context of the Institute’s research on prosperity. High income inequality means that some individuals will enter the workforce and their economic lives at a severe disadvantage relative to others. These individuals will encounter greater difficulties when accessing tools that would help them move from one income group to a higher one (e.g. higher education). The disadvantages are then passed on from generation to generation, making it a chronic problem and keeping the same individuals and their descendants in the disfavoured income group. Meanwhile, the reverse becomes true for the individuals in the highest income group.

When compared to other regions, Ontario might still be considered an equitable society, but the current trend is not favourable. Policy makers in Ontario need to understand the causes of changing patterns of income distribution to properly address this issue. With that knowledge, we will be able to design future public policies and evaluate existing initiatives, both of which can have long-lasting effects to Ontario’s economic outlook.

 

[1] A region with a Gini of 0 has perfect equality whereby every member receives the same income. In contrast a Gini of 1 represents perfect inequality whereby a single individual has the entire region’s income.

[2] The shares of total after-tax income for each of the graphs come from different data sources, with slight differences in methodology and income definitions. This leads to differences in the calculated shares of total income for the quintiles and percentiles. Despite these differences, the overall trends and conclusions are similar. 

Photo Credit: nanmulti, Getty Images 

Category: Income, Income distribution, Income inequality, Public Policy