Finance Committee on April 16th, 2013

[Yanick Labrie, Economist, Montreal Economic Institute]

Thank you.

I'll do my presentation in French, if I may.

First, I would like to thank the Standing Committee on Finance for giving me an opportunity to testify before you on behalf of the Montreal Economic Institute about inequality, a very important area.

Last year I wrote a research paper for the Montreal Economic Institute in which I explained why the income inequality phenomenon is probably less of a concern than many groups frequently imply.

My remarks today are mainly based on that research which I published in May of 2012.

At the time, I reported on five factors that put inequality in perspective. Today I will focus on three of those factors.

First, an increase in inequality can quite often happen at the same time as a decrease in poverty rates.

This is exactly what occurred in Canada over the past few decades. In fact, from 1976 to 1995, a period during which income inequality remained rather stable, the average Canadian household income after tax amongst the poorest 20%, in other words the poorest fifth of the population, barely increased by 4%, taking into account inflation.

Conversely, from 1995 to 2010, a period, according to many, marked by an increase in income inequality and a decrease in government redistribution measures, average income after tax for the poorest Canadian households increased by 25%. That is not insignificant. Remarkably, the number of individuals falling below the poverty line, as measured by Statistics Canada, decreased by more than 60% over the course of that period.

Second, economic mobility is very pronounced in Canada, and even more so for low-income individuals.

Statistics Canada often publishes studies on this issue. One of their last studies was about how incomes for the same households evolved over a period of five years. The analysis of this data shows that the greatest upward economic mobility occurred amongst the poorest 20%. In fact, 43% of those individuals who were in the lowest income quintile in 2005 were in a higher income quintile before the end of that five-year period.

The situation is also very encouraging for economic mobility between generations. In fact, a recent study showed that less than 16% of sons whose father was amongst the poorest 10% remained in that category once they reached adulthood.

Third, disparities in living standards are much lower than the data on income gaps would suggest.

Several economists have in fact shown and underscored the fact that income is not necessarily the best indicator for comparing living standards between different population groups. To the extent that the main concern of people is to be able to obtain goods and services that allow them to maintain an adequate living standard, using consumption measures is more accurate than income measures.

For example, people who are retired have perhaps lower incomes but they also have assets and little debt. The have acquired assets that allow them to maintain a significant standard of living. In that example, their living standards are much better than income data would suggest.

According to Statistics Canada figures, not only has consumption inequality over the past 30 years been less than income inequality, but furthermore it has changed very little over that period.

In conclusion, I would like to recall to the committee that in a survey of the Canadian population in 2009, more than two-thirds stated that they felt it was more important to have a fair opportunity to improve one's economic condition rather than to reduce inequalities.

Inequality can be a concern when a large number of citizens feel that society is unfair and that social mobility is so weak that there is no point in trying to improve one's lot. However that is not the case in Canada. My analysis shows that on the contrary the phenomenon of inequality is a much lesser concern, and economic and social mobility is much greater than several groups are suggesting.

Thank you for your attention.

[The Chair, Conservative, James Rajotte]

Thank you.

We will now go to Mr. Clemens, please, for your presentation.

[Jason Clemens, Executive Vice-President, Fraser Institute, As an Individual]

Thank you, Mr. Chairman. And thank you for the invitation to present before the committee today on an important issue.

I just want to touch on four aspects of the paper for which I was called before the committee. My paper dealt with nine issues, but due to the time limitations I'll deal with those four.

The first is that income inequality is indeed an important issue that we should be concerned with. Unfortunately, more often than not, I believe, it's grossly oversimplified, and by grossly oversimplifying it we risk solutions that are detached in varying degrees from the real underlying problems.

Secondly, we really need to understand some of the measurement problems and challenges we have with respect to measuring income over time. Related to that is an issue that's overlooked all too often, which is a definitional issue. Depending on how we define the income we want to measure—if it's pre-tax or post-tax, whether we adjust for household size over time, or, as my colleague from MEI has mentioned, whether we look at consumption versus income—we can get very different results with respect to measuring inequality. They're all correct, and this is the important point: all of those measures are correct, but they define “income” or “inequality” quite differently. So we have to understand the role of those differences.

I would certainly point the committee to an important paper by Burkhauser, in the United States, on this very issue. In Canada, for example, depending on how you measure, you can go from a decile measure of inequality from 6.5 all the way up to almost 14, which is a range of more than 100% in the difference between decile inequality. So as I say, I think we have to be aware of these definitional roles when we talk about inequality.

Thirdly, there's mobility. I fundamentally don't believe we can talk about or understand inequality without talking about mobility. Again, my colleague from MEI and my colleague from Fraser will speak about this.

Then finally, Mr. Chairman and members of the committee, I think unfortunately too often we conflate the discussion of low income with inequality. I think some of the solutions raised with respect to inequality fundamentally miss the issues with respect to low income, and more particularly those Canadians who get stuck in low income. From a series of Statistics Canada reports we know that there are essentially three groups that look like they get stuck in low income over time. Those are single parents, individuals who fail to complete high school, and Canadians who, unfortunately, have drug and alcohol abuse problems. It strikes me that some of the solutions we talk about in a very narrow sense when we think about inequality really miss the nuances of these three groups and how we could, from a social policy perspective and an economic perspective, more directly deal with the underlying problems of these three groups that get stuck in low income, which to me is a much more important issue than the general issue of income inequality.

With that, Mr. Chairman, I'll cede the chair, so to speak, but those are the four issues I wanted to deal with in terms of my study.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Clemens.

We'll hear from Mr. Lammam, please.

[Charles Lammam, Associate Director, Centres for Tax and Budget Policy and Studies in Economic Prosperity, Fraser Institute]

Thank you, Mr. Chairman, and my thanks to the committee for the invitation to appear today and speak on this issue.

I want to focus my remarks on a recent study that I co-authored, published by the Fraser Institute last year. It's called “Measuring Income Mobility in Canada”. To sum up my perspective, we can't have a meaningful discussion about income inequality if we don't understand the extent of income mobility in Canada.

One of the critical underlying assumptions in the inequality debate has been, and continues to be, that Canadians are stuck in the same income group year after year. If we pause and think about that for a second, it means that for the most part Canadians are born into a certain income group, where they live and die. Now that to me doesn't match up with common sense, nor does it match up with evidence. What we do in our report is we look at the evidence. What we generally find, when we think back to our own experiences, is that most of us follow an income trajectory such that we start off with a low income, mainly because we're young and we don't have education, skills, or work experience. Gradually, over time, as we gain these attributes, incomes increase. Incomes peak around middle age, around 55; as they approach the age of retirement, incomes start to fall. Of course, a lot of stuff happens in between. Some people may transition between jobs, they may lose jobs, or they may exit the labour force. But generally there's an upward transition in income until you're about in middle age, after which it begins to fall.

In our study, we looked at income mobility using historical data from Statistics Canada. We used both survey data and tax filing data. We looked at income mobility over various time periods—two five-year periods, a 10-year period, and a 19-year period. In the short term, over the two 5-year periods, we found that 50% of Canadians who were initially in the lowest 20% of income earners had transitioned outward from those groups. Sorry, I should state that in our study we broke up income earners into five groups of 20% income earners in each. Over the longer term, from 1990 to 2000, what we found was quite remarkable: 83% of Canadians who were initially in the lowest income group had transitioned to a higher income group. We found that 19 years later those same people, almost 9 in 10 of those in the lowest income group, had moved to a higher income group. It's not that they were just moving out of the lowest income group into the second or third quintile. We found that one in five who were initially in the bottom had actually made it up to the top 20% of earners; over two in every five had made it up into the top 40% of earners.

So our study reaffirms what we know from our own experiences. Where we were 5, 10, 20 years ago in income is not necessarily where we're going to be today or in the future. If we don't understand that people's incomes are changing over time, I think we can get misled by looking at snapshots of the income distribution, which is what most people do when they examine income inequality.

Those are my remarks. Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your remarks.

We will begin members' questions.

We'll go to Mr. Van Kesteren, please.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, and my thanks to you all for coming.

This is a fascinating study, and I'm intrigued, Mr. Clemens, by your remarks. You don't hear that a lot today. Am I right to assume that the best advice we can give to society is to get married and stay married; to stay in school, at least get a grade 12 education; and to abstain from drugs? I guess we could expand that and say that we should just make good moral choices. Am I right? Is that what you told us?

[Jason Clemens]

If we look at the data for Canadians who seem to get stuck in low income, it really is the three groups that you've alluded to. Certainly, one is single parents—that's one of the groups that gets stuck to the greatest degree. The data tell us that if you're going to have children, you need to do it in a family unit. Second is completing high school. The data are clear on that: you have to complete high school. Critically what we're starting to see, particularly over the last decade, is assistance in transitioning from completing high school to training after high school, whether that's college, university, apprenticeship, etc. Then finally there is the unfortunate situation of Canadians who have addiction problems. So, absolutely, those are the three groups that seem to get stuck in low income.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

It's really not rocket science.

We love to quote Adam Smith here. If you Google Adam Smith, you'll notice that he was a moral philosopher as well as an economist. There's an intertwining there.

I want to ask you something else, and Mr. Lammam, you alluded to this. Is it correct to say that poverty isn't or shouldn't be a flat line? We're either moving in or we're moving out. Is that a correct assertion?

[Charles Lammam]

First I want to expand on what my colleague Jason Clemens said. Just to put in perspective the percentage of people who fall into those groups and who are there persistently in poverty or low income, StatsCan research suggests that it's anywhere between 1.5% to 3% of the population. There's a very small subset of the Canadian population in low income for a long period of time.

When we're discussing these issues of income inequality, my concern is that we're devising policies for everybody, or a broad part of the population, people who may be temporarily there in low income, like university students, but the people who really need the help are those who are there for a longer period of time.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

I think I heard you talk about opportunity for incentive. If we have a society that's...opportunity is what we really need. There are two factors. There's incentive. Can we take the incentive away from people when we possibly allow them to become institutionally poor?

[Charles Lammam]

Incentives are absolutely critical for young Canadians. They need to know that if they're going to work hard and be diligent, they're going to be rewarded with success and not be penalized. A lot of what we hear in terms of policies that flow from the income inequality discussion is that we're going to tax those who earn more on their income, but what we're doing is we're sending a very negative signal for younger Canadians, because we know from the research we've done that those people will be in the top in due time. We don't want to reduce their incentive to get there.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Mr. Thomas, it's interesting listening to your statistics. It's not a bad thing if we have rich people. Rich people pay an awful lot of taxes. The idea, of course, is to increase wealth in a society. If we move that echelon up, we're going to have more taxes generated for society. Am I right? Is that a proper assertion?

[Gregory Thomas]

There's no question that the best possible thing for government revenues is more rich people. That's absolutely correct.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Mr. Clemens, you had a final comment.

I think I have a few seconds.

[The Chair, Conservative, James Rajotte]

Just a brief response, Mr. Clemens.

[Jason Clemens]

I would recommend looking at the welfare experience across Canada, particularly in Ontario in the early 1990s. It's a real-life experience of exactly what the member of the committee asked about.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Van Kesteren.

Ms. Nash, please.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you.

Good morning to the witnesses. Thank you for being here.

I guess what I hear from Mr. Van Kesteren's line of questioning is if you don't want to be poor in Canada, choose your parents well. I guess that's what I hear him saying.

But let me get to my line of questioning. There was some debate about measures of inequality, and I suppose we could debate how many economists could dance on the head of a pin, but let me quote a couple of outside reputable organizations. The Conference Board of Canada gave Canada a C grade on income inequality and ranked us 12th out of 17 peer countries on income inequality.

The Economist magazine, that well-known left-wing journal, devoted an entire issue to income inequality last October and noted the relative increase in income inequality. Obviously, the U.S. is a more extreme example, but the magazine cited Canada as well. The OECD has found that Canada's level of income inequality is now above the OECD average. In 2011 the IMF, the International Monetary Fund, found that equality appears to be an important ingredient in promoting and sustaining growth. We've heard that from other witnesses. We've all heard, of course, of the 2009 ground-breaking book on inequality by Richard Wilkinson and Kate Pickett that demonstrates that inequality more than GDP or GNP has a significant impact on a range of social indicators, including life expectancy, literacy, teenage pregnancy, and incarceration.

The last point I want to make is that the Canadian tax benefits system used to be as effective as the Nordic countries' system in stabilizing inequality, offsetting more than 70% of the rise of market income inequality; it now offsets less than 40% of the rise of inequality in Canada.

We heard Mr. Alexander, from TD, talk about the important return investment in child care makes. He said that for every dollar you invest in child care, you get between $1.50 and $2 in return. For low-income families, that return is even greater. However, sadly, the OECD ranks Canada last when it comes to child care programs.

I'd like the panellists to comment on this. I won't ask any specific member of the panel, but I'd like to know what your views are on investment in child care services in reducing inequality and having better economic outcomes in Canada, if that would be desirable.

[The Chair, Conservative, James Rajotte]

Who would you like to start?

[Peggy Nash, NDP, Parkdale—High Park, ON]

Mr. Lammam, let's start with you.

[Charles Lammam]

I'd like to maybe address the studies you cited—

[Peggy Nash, NDP, Parkdale—High Park, ON]

Well, no, I'd like to get your comment on the child care issue, if you don't mind. I only have a couple of minutes.

[Charles Lammam]

I haven't done research on child care, but if there is an opportunity, I'd like to comment on the studies you did cite and explain why they're perhaps misleading.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Okay. Maybe someone later can do it.

Mr. Labrie.