Are living standards in Canada becoming more unequal?

Much has been written in recent years about income inequality and the (apparently) growing gap between the rich and the poor. The focus on income is understandable. It’s a measure that resonates with the general public. It’s fairly easy to determine because everyone files an annual income tax return. For the researcher, income is attractive because it’s the most accessible indicator of well-being and is available in most of Statistics Canada's surveys.

However, is income the best way to measure people's actual living standards?

It’s fair to say that it’s not, and a growing number of academics find consumption to be a preferred indicator. The reason is simple. Some people can consume substantially more than their income by borrowing or by receiving gifts. Others consume much less than their income if they save a significant portion or if they pay down debt.

To illustrate, consider a young family that earns $50,000 in 2016 but spends $60,000 (for themselves and their young children) by borrowing and with some financial gifts from parents. Which of those two numbers is a better reflection of their actual living standard in 2016? It’s easy to make the case that the $60,000 consumption amount captures the family's economic well-being better than their income.

If consumption is a better reflection of a household's standard of living, what can we say about the degree of inequality of those living standards over time? A new Fraser Institute study examines the inequality of consumption in Canada over the period 1969 to 2009 (the last year of available data). After adjusting for household size, which has changed quite dramatically over the past four decades, the study finds that consumption inequality has barely changed since 1969. Using a popular measure, inequality of consumption is up only three per cent in 40 years.  

This result flies in the face of studies and reports telling us that Canada is quickly becoming a more unequal and polarized society. There have been scores of media stories (Toronto Star, Globe and Mail, CBC, CTV, etc.) about the alarming rise in inequality in Canada. While these are based on reports of income inequality, usually from left-wing think-tanks such as the CCPA, the Broadbent Institute and the Conference Board, they create the clear impression that the gap between the rich and the poor is widening and we are becoming a much more polar¬ized society. And with these studies, of course, come renewed demands for the government to “fix” the problem with more redistributive actions.

Quite a number of these studies, however, continue to use pre-tax income, which serves to exaggerate the degree of inequality. But people don't get to spend pre-tax income. They can only make spending (or saving) decisions on their after-tax income. So, it’s common by now for credible academic studies to use after-tax income in measuring income inequality.

Further, many of these reports also fail to adjust for household size despite the decline in the size of an average household over the years. More income is now shared among fewer people and, once we account for this, there’s less inequality. Failing to adjust for something as basic as household size is a significant concern and only serves to further exaggerate the degree of inequality.

There has been much change in Canadian society since the 1960s. There has also been a massive growth of the state, which has involved itself in almost every aspect of our lives and is more actively redistributing income than ever before. Yet, almost surprisingly, there has been no substantive change in inequality of how we actually live.

When we look at our best proxy for Canadian living standards, household consumption properly adjusted for size, we find there has been very little change in the "gap" over the past four decades.