Canada now a YOYO economy

Canada is becoming a more unequal country. Most people have known that for some time but now an international report has published the numbers for Canada and other Western world countries.

Canada is becoming a more unequal country.

Most people have known that for some time but now an international report has published the numbers for Canada and other Western world countries.

Canada has one of the highest levels of inequality, even after taking social benefits into account — not as bad as Britain or the United States but nowhere near the more equitable societies in Scandinavia.

In Canada, the top one per cent of Canadians saw their share of total income increase from 8.1 per cent in 1980 to 13.3 per cent in 2007, and enjoyed a much reduced top federal marginal tax rate, which fell from 43 per cent in 1981 to 29 per cent in 2010.

Many provinces have followed suit and, on top of that, the capital gains tax has been significantly reduced while cuts in the GST and the growing use of tax credits also benefit wealthier Canadians disproportionately.

Lower-income Canadians have fared much less well.

From the mid-1980s to the late 2000s, the average annual income for the wealthiest 10 per cent of households rose an average of 1.9 per cent a year, after inflation. That means it would take 43 years to double.

But the bottom 10 per cent of households saw their incomes rise just 0.9 per cent a year, which meant it would take 77 years for the poorest 10 per cent of households to see their much lower incomes double.

Put another way, the report from the Organization for Economic Co-operation and Development — Divided We Stand: Why Inequality Keeps Rising — notes that the average income of the top 10 per cent of Canadians in 2008 was $103,500, or 10 times higher than the bottom 10 per cent, who had an average income of just $10,260.

In 2007, the average income of the top 10 per cent was 10 times higher than the bottom 10 per cent; in the early 1990s, it was eight times higher.

There are a number of reasons why this has been happening.

Globalization is a factor because international competition is putting pressure on wage and benefit levels in Canada. Some industries have been largely wiped out, such as clothing and low-tech components used in many industries. Technology also affects the distribution of jobs, favouring higher-skilled workers over lower-skilled workers.

But the big reason, as the OECD suggests, is the steady weakening of the institutions and mechanisms that once played a significant role in income redistribution, narrowing the gap between the top and the bottom.

Disposable income was the combined effect of market incomes and social and tax redistribution. But the old social contract under which we used social programs to redistribute income and reduce the gap in market incomes has been eroded.

There is less redistribution in Canada today, the OECD says, so that “taxes and benefits reduce inequality less in Canada than in most OECD countries.”

In effect, we have been improving the well-being of the wealthy at the expense of the poor.

To be sure, public health and education have some ameliorating effect, which is why it is important to maintain the quality and accessibility of both.

This, combined with a corporate world where executives and directors have awarded themselves big perks and rich pensions while ordinary workers have been in many instances poorly treated has led to a YOYO (you’re on your own) economy in which employers are rapidly eliminating defined benefit pension plans and other benefits, introducing two-tier wage systems and even pursuing feudal practices such as internships where young people are expected to work for a token.

At the same time, more jobs, especially for young people, are short-term contracts that do not provide the security and benefits of a regular job.

This shift to a YOYO economy isn’t over. Pressures to reduce wages and benefits will continue and there could be further moves to reduce public benefits, such as privatizing parts of health care or requiring user fees, the elimination of breakfast and lunch programs in schools and withdrawal from social housing.

But a society of growing inequality is not a healthy society — it leads to gated communities, a noticeable underclass, growing social tensions and political extremism, all of which we see south of the border.

We still have time to take a better course, and that is one of our great challenges if we want a prosperous and equitable country with a shared citizenship and participation.

Economist David Crane is a syndicated Toronto Star columnist. He can be reached at crane@interlog.com.