What matters is income mobility not inequality

Given the continuous stream of media stories highlighting growing income inequality, it’s understandable that Canadians are worried about the implications. Thankfully however, the story of rapidly rising income inequality in Canada is just that, a great fictional tale.

Let’s start with the typical analysis of income inequality which compares the income of people or households in say the top 10 or 20 per cent with the income of those in the bottom 10 or 20 per cent.

In 1969, the first year for which we have data, the top 10 per cent of households earned 7.8 times the average income of the bottom 10 per cent of households. In 2008, the latest year for which we have data, the top 10 per cent of households earned 9.3 times the average income of the bottom 10 per cent of households.

Based on this data, income inequality has increased over the past 40 years though not as dramatically as most Canadians are led to believe.

Unfortunately, this analysis like most others of inequality is fundamentally misleading because it ignores income mobility.

The assumption upon which almost all inequality analyses are conducted assumes that the people who are in the bottom and top income groups remain in those groups over time.

This, of course, does not equate with the life experience of the great majority of Canadians.

Using Statistics Canada’s Longitudinal Administrative Databank, a recent study, Measuring Income Mobility in Canada, tracks a sample of a million Canadians to see how their incomes change over time.

In 1990, the lowest 20 per cent of income earners (Canadians were put into five income groups from lowest to highest income, with each group containing 20 per cent of the total) earned an average income of just $6,000 in wages and salaries in 2009 dollars.

By 2009 (the last year for which we have data), 87 per cent of those in the bottom income group moved to a higher group (an almost equal proportion moved into each of the four higher groups). In other words, almost nine out of 10 Canadians who started in the bottom 20 per cent had moved out of low income. By 2009, their average income was $44,100.

Of course, people also move down the income ladder. For example, 36 per cent of those initially in the highest income group in 1990 moved to a lower income group by 2009. The average income of those originally in the highest 20 per cent of income earners in 1990 increased from $77,200 to $94,900 by 2009.

Perhaps the most powerful conclusion from this study is with respect to income inequality. Consider that the average income of those initially in the top 20 per cent in 1990 ($77,200) was 13 times that of those initially in the bottom 20 per cent ($6,000).

By 2009, the income of those who were initially in the top 20 per cent ($94,900) that was only twice as high as the income of those who were initially in the bottom 20 per cent in 1990 ($44,100). Put simply, income inequality decreased, not increased from 1990 to 2009 when we consider the same group of people.

The conclusion that inequality is on the rise couldn’t be further from the truth and misses one of the great Canadian virtues: We live in a dynamic society where the majority of us experience significant income mobility over the course of our lives.