Thank you, Mr. Chairman and committee, for inviting me.
We submit that this is an issue that is important to review and monitor and to create a public policy framework around. My comments and the data behind them can be found on our website, in a section called “How Canada Performs”.
How is inequality measured? There are three ways.
One, the Gini coefficient, which I'm sure you've heard about, ranges from zero to one, where zero is perfectly equal distribution of income. Canada ranks 12th out of 17 peer countries on the Gini index, with number 1 being Denmark, and the worst performer, number 17, being the U.S. As we did, 12 of 17 peer countries experienced an increase in the Gini coefficient from the mid-1990s. The countries with the lowest Gini coefficients during that period, Sweden and now Denmark, have either implemented or are looking at measures to increase their Gini coefficient.
The second way to measure it is to divide the population of income into groups such as fifths, or quintiles. The facts are that the largest gain has been seen in the top quintile—something that's been noted before—and the lowest increase has been in the third or middle quintile. The middle class is truly being squeezed.
The third way to calculate it is to calculate the gap in average income between, let's say, the richest 20% and the poorest 20%. As is also the case for most of our peers, the gap in Canada is growing. This is due largely to technology and globalization, but also to tax policy.
Because of the use of different measures, income inequality can be open to different interpretations. But it is clear under all measures that inequality increased in Canada during the 1990s, something that has happened with a majority of our peer countries. We are higher than we used to be, but we are somewhere in the middle of our peer group, and we are not getting worse. Nor do we have the extent of the issues being raised in the fairness debate by our neighbour.
There are two other factors, often raised in any discussion of income inequality, that complicate discussion of the issue. First is income mobility. The ability to move between income ranks is often raised in a discussion of inequality. The second, absolute versus relative incomes, is usually a discussion about how a rising tide raises all boats.
Is income inequality really an issue in general? Experience and objective research tell us that it can be if it rises too high, but there has to be some inequality for markets to function and to create incentives for effort and investment.
The negative impacts of high levels of inequality include a break in social cohesion and a rise in political instability, a consequential decrease in foreign and domestic investment, a decrease in economic growth potential—and this is from a recent IMF study—and a waste of human potential. If lower-income individuals have more limited access to education, skills training, and employment, we will not be fully utilizing the skills and capabilities of all of our citizens. Another issue is a more limited ability by individuals in lower-income ranks to apply their skills to pursue entrepreneurial opportunities. Finally, there is a limiting of the government's ability to deal with economic shocks by raising taxes or cutting spending.
There are also arguments that higher levels of inequality support economic efficiency, innovation, and entrepreneurship. Does this mean we don't have to worry about inequality? No. We want to maintain good mobility and we want to worry about structural inequality, because not everyone has the means or access to move between income groups. But mobility does not remove all of the other negative impacts of higher inequality, including those on growth potential, use of skills, etc.
Are we where we want to be? Should we actively address this issue? The answer is that we probably should. On balance, we can do a little better. But like most economists, I have a second opinion. Do it in a forward-looking way rather than through an immediate structural shift. Acting precipitously has more downside than upside. The IMF rightly warns that poorly designed efforts to reduce inequality could distort incentives and undermine growth. One needs a win-win policy implemented over time.
How could we go about it? Are there some levers? You've heard a number of them today. Invest in education: early education, primary education, secondary education, and post-secondary. You have to address all of them. Invest in early childhood development. Recent research strongly suggest there's a huge payback. Implement active labour market measures to boost employment. Improve access to capital for those in lower-income ranges—microfinance, for instance. Remove the welfare wall built into the tax system, and eliminate distortions and improve efficiency in the tax system.
What are the conclusions? Under all measures, inequality increased in Canada in the 1990s. We are higher than we used to be. Again, we're somewhere in the middle of the pack, and we're not getting worse. This is an issue that deserves close attention. Inequality can undermine Canada's economic performance and prevent individuals from reaching their full potential. Numerous policy levers exist and can be refined to actively address the issue.
Thank you very much.