Finance Committee on April 30th, 2013

[Michel Venne]

I thought I had a minute left. So I will wrap it up.

We need policies to ensure that the middle class is stable and strong. Some ideas have already been put forward. We at the institute encourage continuing this debate. If I had a single recommendation for you—besides those I have already issued—it would be to continue the discussion across Canada. This is a new topic and a new concern. You should carry on this work.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Venne.

Now we'll go to Professor Fortin in British Columbia.

Thank you so much for being with us here this morning, especially as I know it's three hours earlier for you in B.C. We welcome your five-minute opening statement, and then we'll go to questions from members.

[Prof. Nicole Fortin, Professor, Vancouver School of Economics, University of British Columbia, Senior Fellow, Canadian Institute for Advanced Research, As an Individual]

I'm glad to be here.

Today I will provide some highlights on a recent paper on Canadian wage inequality in Canada.

As others have said, it's important to note that the changes in income inequality in Canada have been different from changes in the United States, where the changes were larger, happened earlier, and resulted in greater gains at the top than in Canada.

Second, as already mentioned, the Canadian fiscal regime does somewhat lessen the blow of increasing inequality. In 2009, the inequality in the after-tax and transfer of family income was 28% lower than the before and after-tax transfer of family income inequality. Nevertheless, given the tension between redistribution and economic growth, it's important to consider the economic forces that are behind the changes and whether they can be addressed directly.

To understand how these forces work, we have to note that in the 2000s especially, the Canadian experience with wage inequality has been one of wage polarization. When we're talking about wage polarization, we're talking about situations where the wage of the median worker—and here I am talking mostly of the median male worker—is not improving as much as those at the bottom or at the top. In the 2000s, the real—meaning after inflation—hourly wages of the median male have increased by 5%, while the wages of the men at the top 90% have increased by 12% and those at the bottom by 9%.

That being said, in terms of the Canadian post-recession experience, from 2009 to 2012 we have seen decreasing wage inequality. This is in contrast with the U.S., where wage inequality has continued to increase.

So what are the driving forces behind the difficulties of the middle workers? They are usually attributed to two forces: declining unionization rates and technological change. In Canada, the decline in union coverage of males has been quite substantial; it dropped from 47% in 1980 to 25% in 2012. The reason that declining unionization rates do contribute to the polarization of male earnings is that the union premium is highest in the lower wage distribution of males.

Technological change is also thought to adversely affect mostly the routine, male-dominated jobs that are in the middle of the wage distribution, the wages on the plant floor.

Let's note that these forces apply less to women because they are more likely to work in the wider public sector, including the health and education sectors. So women fare generally better against these winds of change than men; however, there remains a gender gap.

In terms of some of the policy options that work with these forces, many of them come under provincial jurisdiction. They would include the support for public education. Most of the time we talk about higher education, but it's also important to have policy to foster high school completion. When we're talking about exclusion, we're usually talking about individuals who have not completed high school. Support for a minimum wage in an appropriate range is among the policy tools to be thought about, as is support for collective bargaining.

As I noted, Canada has performed relatively well in terms of generating new university degrees. However, it is important to note that not all carry the same prospect of high-paying jobs. In a changing environment, information relative to the prospects of the different degrees I think is quite important.

Raising the minimum wage is a tool that can help reduce inequality at the very bottom of the wage distribution. However, because there is limited spillover, it's not a very effective tool overall.

Moving in the direction of a policy environment that is more supportive of unions, especially in terms of the procedure governing union certification, is one option to be considered.

Let me conclude by saying, as many others have done before me, that while growth-oriented economic policies, such as encouraging trade and deepening investment in new technology, may provide the basis for economic success for future generations, these policies may also have the effect of exacerbating inequality. This should be kept in mind to continue to get public support for such policies.

This concludes my remarks.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation, Professor Fortin.

We will begin members' questions with Ms. Nash, for a five-minute round.

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

Five minutes, after all those wonderful presentations, is a bit challenging.

Let me begin with an issue that Mr. Venne raised, which is that of course we need to eliminate poverty and have measures that can do that. We've heard many of those today, but what about the stagnating incomes of the middle class? My question is, most broadly, where will the middle class jobs come from?

Specifically, can you give some examples of countries that have resisted this widening inequality? What measures have countries that have managed to maintain a strong middle class taken to do that, and where are the good middle-class jobs that young people aspire to in those countries?

It's a broad question. I'll ask it to Ms. Yalnizyan, Monsieur Venne, and Madame Fortin.

[Armine Yalnizyan]

Good middle-class jobs can come from anywhere. Around the world, whether you're talking about IT, high-technology information jobs or resource-based industries, we see that it depends on how you treat the environment for labour relations. Canada has been pursuing a low-wage strategy for several decades now. We have an unusually high proportion of low-wage jobs.

Income inequality doesn't fall from the sky. We look at one another and we value each other's work. We say it's normal that that guy gets that much and that person gets that much, so there's a kind of social and cultural consensus around the value of different forms of work, which is why I have pointed out the importance of unions in many of the jurisdictions in which growing inequality has not occurred and in fact has been reversed. There has been a strong union component because that's actually the countervailing voice to the growing strength of employers everywhere around the world, especially in the wake of the recession—there's been growing corporate concentration.

If you cannot negotiate on an equal playing field and have some kind of collective strength, more of the rents from this process will flow to the employers and to the property owners.

You also asked a question about what these nations are doing that prevent the middle class from stagnating. Let me run a thought experiment on you. What if we had no reduction in income inequality at all but we improved people's access, whether they're low, high, or middle income households, to transit, to more affordable and accessible, high-quality child care that prepares kids for learning readiness, to better public school education and high school completion, and to more affordable housing? All of those things will improve our quality of life and create a richer middle class. I think we can do this.

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

Thank you.

Mr. Venne, do you have anything to add?

[Michel Venne]

I am accompanied by my colleague Nicolas Zorn. He is the researcher who put together our file on social inequalities and all those issues, so I will ask him—if that's okay with you—to answer your questions and any other questions.

Nicolas.

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

Thank you.

[Nicolas Zorn, Project Officer, Rendez-vous stratégique, Inégalités sociales, Institut du Nouveau Monde]

Good morning, ladies and gentlemen members of the committee.

The problem, in terms of middle class income, is that there is some polarization, which is in part due....

[The Chair, Conservative, James Rajotte]

We're having a problem with translation.

[Nicolas Zorn]

Is it okay now?

[The Chair, Conservative, James Rajotte]

Please continue.

[Nicolas Zorn]

In particular, the polarization is due to a drop in trade unionism and an increase in competition among developed countries. Free trade contributes to that polarization. It's not tragic to lose your job, but being unable to find another one is. The issue does not lie in the fact that the market is very competitive, but that it takes no heed of individuals. The longer we wait, the more compromised the human capital becomes. The solution has to be based on access to education, lower tuition fees and public child care.

The problem is not that economies are more competitive, but that the risks involved in that increased competitiveness are not shared equally. The tragedy is in the fact that some people lose their job and take a few weeks to find a new one, but others take two years and give up after a while.

[The Chair, Conservative, James Rajotte]

We're over time, but, Professor Fortin, could you just very briefly respond to that question?

[Prof. Nicole Fortin]

[Technical Difficulty—Editor]...in routine jobs that have been displaced. It's good to hear that those who are doing very well have been able to recycle, many of them in IT jobs and so on. There are possibilities there, of course. The lowest performing will move to service jobs, which are lower paying. Many of those service jobs, though, are less prone to issues of outsourcing, so they can resist some of these winds of change we've been talking about.

An economy such as Germany's, which is built on the exportation of machine tools in quite large part, has performed relatively well. However, there's been some polarization of earnings, even in a country where apprenticeships and training of skilled workers is very important.

There's a sense that taking a diversified approach, continuing to train workers to perform and having more technology-oriented jobs, is the way of the future.

[The Chair, Conservative, James Rajotte]

I'll just point out to all of our guests here and all colleagues that members have five minutes, so it's a very short period of time. It goes by very quickly. I would just ask everyone to be as concise as possible.

We will go to Ms. McLeod, please.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you, Mr. Chair.

Thank you to all the witnesses for some great presentations.

Seeing as it's tax day...I heard a few comments in terms of the tax system. As the parliamentary secretary for the national revenue agency, I just want to make a note that certainly our goal is closing the tax loopholes. We've made significant progress. There's certainly more to do in terms of tax evasion and offshore tax havens.

As for CRA staffing, we actually have 400 more auditors than we did in the past. As far as where we've looked at reductions goes, of course, I think probably most people have electronically filed. Really, we are trying to refocus our resources to actually do exactly what you said.

I certainly wanted to make that comment and not leave it unresponded to, because we do recognize how important it is to have a tax system that's fair to all Canadians.

I will start my questions with Mr. Richardson. I appreciate your article, “Some Observations on the Concept and Measurement of Income Inequality”. You state that “income inequality is a relative concept”. We've heard from other witnesses who've also said that looking at a single group as a snapshot in time doesn't actually look at an absolute level.

I've watched a number of young adults, friends of my children, who have graduated from high school and graduated from university. Certainly many of them are enjoying life right now. They're certainly not at a high-income level. I anticipate that will change over time.

Can you elaborate? Does a single sample group give us a true picture of the real economic conditions? Just talk a little bit more about your graphs.

[Stephen Richardson]

I think the point is fairly straightforward, in that a country like the United States or Canada could have a very high level of income inequality and yet the people at the middle or even the bottom of the income scale would be, in absolute terms, more well off economically than some place that had a very equal distribution—maybe some place like Cuba, which is very equal and very poor.

It doesn't mean that income inequality is not an important concept in Canada, so I'm not intending to demean the idea or the importance of it. I would note however—I don't know if it's possible to view the first slide again. I apologize to Nicole Fortin if it blots out her presence momentarily.

This point goes to the question of overall economic growth and overall income levels. There have been a number of comments about the growing inequality gap. Well, actually, those are the numbers. If you look at the red line, there is almost no increase in inequality in the last ten years. In fact, the actual percentage increase in the last ten measured years, according to Statistics Canada—I don't make this stuff up, I just use it—is 0.4%. If the rich are getting richer, which may be the case, something else has to be happening as well to result in not having an overall increase in inequality. That means that some other people on the income scale have to also be doing well.

So the fact that there is greater growth in some parts of the income scale may raise some issues, but from the overall data it looks as if Canadians in general—as I think Madame Fortin mentioned as well—are really doing a lot better than some other countries, particularly the U.S.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

I see you're using the Gini coefficient, and I understand that's a fairly common tool. Obviously it can provide us with valuable information.

What are some of the lacks or issues with the Gini coefficient as a measurement tool?

[Stephen Richardson]

There are lots of issues with the Gini as a measurement tool, although it's not clear there is a better one.

The other tool that I'm familiar with has been used in Statistics Canada in work by Frenette, Green, and Milligan. Instead of the labour surveys and the types of data that are used in the Gini coefficient, they have used income tax data and related materials. They've written a couple of papers. Their last one was in 2009, I think. I have the reference if anybody wants it.

They have indicated that they think perhaps the Gini coefficient, to some extent, understates the effects of the two ends of the income spectrum. However, when they did their results, they really weren't significantly different from what you're seeing here, in effect. They've only done them through the year 2000.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Do you have any comments regarding mobility? Is there any good tool that looks at mobility?

[Stephen Richardson]

I'm not an expert on that. Maybe Michael Veall would like to comment on that.

Mobility is a very important issue, because again, even when you look at stable inequality, when you look at income distribution, we don't know it's the same people at the high end all the time. It may be people who are there once and then gone because they've had some large realization. So mobility is an important issue.

I can't give you too much detail, but maybe Michael....

[The Chair, Conservative, James Rajotte]

I think we have two who want to comment. Again, we're running very short on time.

I have Ms. Fortin and then I have Mr. Veall, please.

[Prof. Nicole Fortin]

There is only one tool to describe wage inequality. This would actually add more emphasis to what's happening in the middle.

To the extent that we're concerned about people at the top getting an increasing share over time, they're not necessarily describing that phenomenon.

I've provided some charts in the brief that I've given that show alternative ways of describing that. They're mostly graphical in nature.

In our discussion paper we also talk about the role of income mobility, that is, the idea that from year to year a person's income may vary, and what impact it could have on wage inequality and whether it could help. Basically the big facts still remain, even when we take into account the idea that from year to year each person's income may vary.