Thank you very much.
Thank you for the opportunity to speak to you today on this important issue.
I think one of the core issues is that across the entire industrialized countries, we've been seeing rising income inequality. This is a product of the capitalist economic system, which has been demonstrated to be the most efficient system for generating a rising standard of income. The challenge is that the economic model does not create equal opportunities for all. That's where there is a role for public policy to play. This is why we have a progressive tax system in Canada. This is why we have the social security system.
Now, in terms of economic literature, economics has traditionally focused on income inequality in terms of playing down its role as a problem. It tends to focus on it in terms of an incentive to work and invest, or the product of uncertainty around income and volatility of income. However, like most things in life, excess brings consequences and negative, very powerful forces. Moderate income inequality actually can be healthy. Excessive income inequality can actually create enormous social, health, and economic strains.
A growing body of economic literature emphasizes this. A number of books that have been written, including The Spirit Level and a variety of other works, emphasize the negative forces that are created by income inequality. One of the core challenges with a lot of these studies is that correlation isn't always causation. Nevertheless, even when you look at work done by the IMF, it does argue convincingly that elevated income inequality can be economically damaging.
In the wake of the financial crisis, it isn't surprising that we're seeing increased attention focused on this as a pressing issue. If you look at the unemployment rates in Europe, if you look at the poor labour market outcomes in the United States, you can understand why this is a growing and pressing issue.
In Canada the story about income inequality is one that's a little more nuanced than what we're seeing in some of the other nations. If we look at it in relative terms, income inequality in Canada is the second lowest in the G-7. Canada has relatively good social mobility. It's the highest in the G-7. But it is true that income inequality in Canada has in fact been rising.
When we look at the Gini coefficient, which is basically the best overall benchmark of what's happening to the economy as a whole, you can see that income inequality was rising in the seventies and eighties in a very gradual rising trend. Then we had a big jump in inequality in the mid-nineties, which seems to correlate with when governments were tackling their deficits. In the mid-nineties we saw a big cut in transfers to individuals, and that seems to have created a very sharp increase in income inequality.
After the nineties, we see that the Gini coefficient is broadly flat. It might have a slight upward slope, but it's extremely small. It's almost negligible. This is surprising, given the public attention on income inequality.
As Diana Carney emphasized, the Gini coefficient isn't very good at telling you what's happening at the tails of the distribution. There's no question that top income earners are receiving a greater share of income. The top 1% has gone from about 7% of national income in the eighties up to 11% of national income in 2010.
Work done by people like Michael Wolfson has emphasized that if you actually look at it, half of the increase in income at the high end of the income scale is actually not just the 1% or the 0.1%; it's actually the 0.01%. So what you're really talking about is a very small number of individuals getting a larger share of income.
There is also a broader structural story taking place, and that broader structural story is around the fact that the economy is shifting towards more high-skilled, higher-waged jobs. This is a healthy outcome for the Canadian economy, but it does mean that it can lead to higher income inequality.
I would stress that I think the focus really should be on removing barriers to opportunity for people at the low end of the income scale. If you look at the bottom 20% of income earners, they earned a market income of only $3,100 in 2010. Our social security system and tax system, transfer system, will bring their income up to $15,200, so it is working to try to reduce income inequality and provide support, but understand: try living on $15,200.
What we have is a problem at the low end of the income scale that there are barriers to growth. We have 9% of Canadians living in poverty. That's three million Canadians. It is costing the economy a lot of money. In Ontario the estimate is that it takes $32 billion to $38 billion a year to basically combat poverty and forgone tax revenues.
The numbers of seniors and children in poverty has actually diminished because of actions taken by government, but at the same time the percentage of poor—they are classified as working poor because they have someone working in the household—is now 40%.
There are areas of weakness or vulnerable populations—aboriginals, recent immigrants, people with disabilities—but I would caution about looking just at silos. We have real, fundamental problems with high marginal tax rates on people coming off income support programs: an inability to accumulate assets; poor literacy skills and essential skills, which are the foundation for growth, and many workers lack the skills that businesses need.
I'll stop there because I've gone over my time. Thank you very much.