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Tuesday, 9th June 2009

The Economic Well-Being of Canadians: Is there a Growing Gap?

The Economic Well-Being of Canadians: Is there a Growing Gap?
Source: Fraser Institute

Recent papers on income inequality appear to confirm the results of earlier studies showing that there is a growing income gap in Canada. Studies by Yalnizian on the after-tax incomes of families with children and Heisz on household after-tax incomes present evidence of rising income inequality. Earlier, Frenette, Green, and Milligan; Frenette, Green, and Picot; and Heisz, Jackson, and Picot all found empirical evidence of rising inequality of after-tax family incomes, especially after the mid-1990s. These results, however, stand in contrast to studies done earlier than 2001. Beach and Slotsve, Smeeding and Grodner, and Wolfson and Murphy found no evidence of rising disposable income inequality—at least up to the mid-to-late 1990s—in Canada. So, to the extent that there is a growing gap, it appears to be a newer phenomenon.

These latest results have received considerable publicity in the major Canadian media including the Toronto Star, Maclean’s magazine, and the main television networks. However, this attention is not new. Inequality and the gap between the rich and the poor have been prominent topics in the news for many years. Public attitudes about inequality, arguably influenced by media attention, are such that a significant majority of Canadians believe that the gap between the rich and the poor is growing.

The evidence of growing income inequality is not limited to Canada. Recent studies have presented substantial empirical evidence of a growing gap in the United States and in Europe. The Saez-Piketty evidence for the US, based on tax-filer data, however, has been criticized as being highly misleading. Alan Reynolds has argued that a number of tax changes in the US have resulted in a shifting of income into reportable higher-end incomes. As well, the exclusion of transfer payments (an important source of income at the low end) and evidence of growing unreported income tend to understate bottom-end income. When these factors are accounted for, Reynolds argues that “there is no clear evidence of a significant and sustained increase in the inequality of US incomes, wages, consumption, or wealth since the late 1980s”. However, using Canadian tax-filer data, Saez and Veall find that the top share (i.e., 1% and 5%) of gross income has surged in recent years. The authors argue that this finding closely parallels the US experience which, in turn, casts doubt on tax-induced explanations for the surge in both countries.

This paper has two purposes. First and principally it is a critical examination of the evidence for a “growing gap” in Canada. The paper will attempt to look at inequality in a somewhat broader context than is customary. Evidence drawn largely from household-spending data files as well as from household facility-ownership data and household net-worth data can shed additional light on the trend in inequality for Canada. Second, the paper will examine the issue of data reliability in the context of the measurement of inequality.

+ Full Paper (PDF; 852 KB)



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