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Income gap widening in Canada: OECD

Income gaps in most OECD countries are at their widest in over 30 years, according to the Organization for Economic Cooperation and Development. And the income gap in Canada has grown sharply since the mid-1990s.

In Divided We Stand: Why Inequality Keeps Rising, a report released today, the OECD said:

The income gap has risen even in traditionally egalitarian countries, such as Germany, Denmark and Sweden, from 5 to 1 in the 1980s to 6 to 1 today. The gap is 10 to 1 in Italy, Japan, Korea and the United Kingdom, and higher still, at 14 to 1 in Israel, Turkey and the United States.

In Chile and Mexico, the incomes of the richest are still more than 25 times those of the poorest, the highest in the OECD, but have finally started dropping.

Income inequality is much higher in some major emerging economies outside the OECD area. At 50 to 1, Brazil's income gap remains much higher than in many other countries, although it has been falling significantly over the past decade.

In a two-page Country Note: Canada, the OECD notes that "Income inequality among working-age persons has been rising in Canada, particularly since the mid-1990s. According to the latest data, the level of inequality is above the OECD average but still below that of the US."

The average income of the top 10% of Canadians in 2008 was 103 500 can $ (84 600 USD), 10 times higher than that of the bottom 10%, who had an average income of 10 260 can $ (8 400 USD). This is up from a ratio of 8 to 1 in the early 1990s.

The rise in inequality was largely due to widening disparities in labor earnings between high and low-paid workers, but also to less redistribution. Taxes and benefits reduce inequality less in Canada than in most OECD countries.

The richest 1% of Canadians saw their share of total income increase from 8.1% in 1980 to 13.3% in 2007 ... . Moreover, that of the richest 0.1% more than doubled, from 2% to 5.3%. At the same time, the top federal marginal income tax rates saw a marked decline: dropping from 43% in 1981 to 29% in 2010.

... In Canada, increased earnings inequality was also driven by a rise in self-employment, as on the whole the self-employed earn less than full-time workers. This explains more than one-quarter of the increase.

Societal changes, such as more single parent families and people living alone, and people marrying within similar earnings classes, contributed little to inequality. At the same time, higher employment rates for women helped reduce household earnings inequality by around the same amount. The rising gap between men’s earnings remains the main driver, explaining more than 40% of the increase.

Prior to the mid-1990s, the Canadian tax-benefit system was as effective as those in the Nordic countries in stabilising inequality, offsetting more than 70% of the rise in market income inequality. The effect of redistribution has declined since then: taxes and benefits only offset less than 40% of the rise in inequality.

Among the OECD's recommendations for narrowing the gap:

Investing in human capital is key. This must begin from early childhood and be sustained through compulsory education. Once the transition from school to work has been accomplished, there must be sufficient incentives for workers and employers to invest in skills throughout the working life.

Reforming tax and benefit policies is the most direct instrument for increasing redistributive effects. Large and persistent losses in low-income groups following recessions underline the importance of government transfers and well-conceived income-support policies.

The growing share of income going to top earners means that this group now has a greater capacity to pay taxes. In this context governments may re-examine the redistributive role of taxation to ensure that wealthier individuals contribute their fair share of the tax burden.

Crawford Kilian is a contributing editor of The Tyee.

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