Inequality is Fundamentally Misunderstood

The perennial debate regarding income inequality ebbs and flows but never disappears. For a variety of reasons, including the backlash against corporate bailouts in 2009 (well deserved), the election and re-election of Barack Obama, and a deluge of reports spanning the political spectrum, income inequality has vaulted to the front of the public’s concerns. Unfortunately, the discussion of inequality is almost always fundamentally misstated because it ignores income mobility. We cannot correctly discuss inequality without understanding how the income of individuals naturally changes over time.

The assumption upon which almost all inequality analyses are conducted is that people’s incomes remain stationary over time. In other words, the analyses assume that the people who are rich or poor today remain so over time. This of course does not equate with the life experience of the great majority of Canadians.

Consider most people’s basic work experience. Young people start out in informal part-time work such as cutting a neighbour’s lawn, which progresses to formal part-time work perhaps at a fast-food chain or retail store. That part-time work progresses as the young person advances through school and then the big break – full-time work once school is completed.

And even then, almost all of us started out at the bottom due to our lack of job experience. As we gained that experience, however, we moved up the organization, enjoying more responsibility and higher compensation. This period extends for decades as we work through our prime earning years. Eventually we start scaling back our work time as we approach retirement.

A new study, Measuring Income Mobility in Canada, provides fresh evidence of just how much the incomes of Canadians change over time. Using Statistics Canada’s Longitudinal Administrative Databank (LAD), the study tracks a sample of a million Canadians that were divided into five income groups (from lowest to highest income with each group containing 20 per cent) and then followed over time.

From 1990 to 2000, one of two long-term periods covered in the study, 83 per cent of those who started out in the bottom 20 per cent moved up to higher income groups. Similarly, 65 per cent of those who started out in the second lowest income group moved up.

Of course, some people moved down the income ladder. For example, 21 per cent of those initially in the highest income group in 1990 moved to a lower income group by 2000. Indeed, the top income group experienced the largest percentage downward mobility. This is exactly what we would expect given natural work and life progressions.

When the time period is extended to 19 years (second long-term period covered), from 1990 to 2009, upward mobility increases. Eighty-seven percent of those who started in the bottom 20 per cent moved up to higher income levels. Notably, 21 per cent of the people who started in the bottom 20 per cent (1990) had reached the top 20 per cent by the end of this period.

Another way of looking at mobility is to examine how the incomes of people changed over time regardless of their relative standing by income group.

The average income (wages and salaries) for people who started the period (1990) in the bottom 20 per cent was roughly $6,000 (in 2009 dollars). By the end of the period, the average income of these same individuals had risen to $44,100, an increase of 635 per cent. Contrast that with the increase for those individuals who started out in the top 20 per cent. They experienced an increase in average income of $17,700 or 23 per cent. Clearly the results contradict the generally-accepted narrative that the rich did well at the expense of the poor.

Canada is a dynamic economy where individuals can indeed make themselves better off by completing (and continuing) their education, acquiring job skills, and gaining work and life experience. People naturally move up (and down) the income ladder over time as their circumstances change. Ignoring these natural changes in people’s life circumstances severely limits the usefulness and applicability of inequality studies. Indeed, there is a real threat from ignoring mobility that the solutions posed to “solving” inequality may indeed worsen it by reducing or even limiting mobility.