NDP MP Peggy Nash.
Credits: Ernest Doroszuk/QMI AGENCY)
Responses to the Fraser Institute's recent study, Measuring Income Mobility in Canada, reveal a great deal about the differing views on social policy and the state of the debate regarding inequality.
The NDP's finance critic, Peggy Nash, argued mobility and inequality were two separate issues that should not be connected and the real issue was the "growing gap between those at the top and those at the bottom." Nash's comments reveal two significant problems in the discussion of inequality and social policy. They assume people are stuck in their current situation and we should, therefore, worry about static comparisons of income at any given point of time.
Prominent Toronto radio host John Moore echoed such views when he asserted that some poor people do manage to lift themselves out of poverty but it's not the norm.
Even University of Ottawa professor and Canadian Research Chair Michael Wolfson claimed that the "reality of precarious jobs amongst the poor...are ignored by the Fraser Institute as it tries to perpetuate the Horatio Alger, 'rags to riches' myth." The evidence reported in our study, which is corroborated by previous research including work completed by a collaborator of Wolfson, shows the people experiencing low incomes today are overwhelmingly not the people experiencing low incomes tomorrow. Specifically, 83% of Canadians initially in the bottom 20% of income earners in 1990 moved to a higher income group by 2000. By 2009 (the last year for which we have data), 87% moved up.
In other words, nearly nine out of 10 Canadians who started in the bottom 20% had moved out of low-income.
Ignoring mobility and the incentives related to promoting it (or discouraging it) can and has led to extraordinarily damaging policies. In the late 1980s, most provincial governments began increasing welfare benefit rates to the point where they markedly exceeded what an individual could earn from low-pay work.
While well intentioned, the result was a strong incentive for people to choose welfare over work. The result was welfare dependency hit 10.7% of the population in 1994, representing 3.1 million Canadians.
The second problem illustrated by Nash's comments, echoed by David MacDonald of the Canadian Centre for Policy Alternatives, is that the gap between the rich and the poor is widening. This conclusion, however, which MacDonald characterized as "the rich stay rich and everyone else churns around in the bottom," totally ignores what's actually happening to individual people's income over time.
Our study tracked the income gains of the same people by their initial income group. Individuals who started in the bottom 20% in 1990 experienced an average increase in their inflation-adjusted income of $38,100. People who started in the top 20%, on the other hand, gained an average of $17,700 in inflation-adjusted earnings over the same period.
This clearly demonstrates that those initially in the bottom 20% experienced the largest dollar and percentage gains in income (after inflation). It's difficult to observe such gains in income and conclude that people are stuck or simply "churning around in the bottom." The goal of our study was to illuminate the reality of how the incomes of working Canadians change over time, which we argue must be incorporated in the debate on inequality as well as the larger discussion and formulation of social policy.
Ignoring a natural and present phenomenon such as mobility will lead to worse policy and outcomes for Canadians, especially those currently at the bottom of the income ladder.
-- Veldhuis and Clemens are economists with The Fraser Institute