W5 Income Inequality

Social Class & Economic Inequality - McIvor Lecture

Economic Inequality

Part A: Understanding Income Inequality & The Matthew Effect

What Is Economic Inequality?

• Economic inequality = "disparity in the distribution of income between individuals, groups, populations, social classes, or countries"

• Essentially, when we study economic inequality, we study who is rich and who is poor, and we determine how to accurately measure the inequality or difference between these two categories

  • How would you determine if someone s rich or poor?

• The first thing people think when they consider economic inequality is how much income someone makes.

• The first step in studying ant concept, and an essential step for being able to compare something over time or between regions (such as provinces or countries) is deciding how to measure the thing in question, which right now is income

• We call the process of determining how to measure something "operationalizing" it. The formal definition of operationalize is "the process of turning abstract concepts into measurable observations"

• It is important to operationalize concepts to ensure everyone is on the same page and because most concepts are more complicated than they appear

• For example: think of flight as the concept; then flight as an operationalized idea

• Two questions we want to answer to understand income better:

  • How do we measure income and who is rich and poor?

  • How do we compare today to the past when it comes to socioeconomic status?

Inflation

• When assessing income over time we first need to adjust for inflation

• Inflation adjusts for how expensive things are and thus, makes historical comparisons possible

• In Canada, for example, Statistics Canada prepares the Consumer Price Index to measure inflation each month. It sets inflation based on the price of a 'typical basket of goods'. This basket includes the average cost of:

  1. Food and shelter

  2. Household operations

  3. Furnishings and equipment

  4. Clothing and footwear

  5. Transportation

  6. Health and personal care

  7. Recreation/education/reading

  8. Alcohol/tobacco/cannabis

• Why is it important to adjust for inflation?

  • If we just looked at say average income over time, it will lead us to believe that incomes have increased a lot.

  • In 1976 the average Canadian made $14,119/yr in employment income. In 2021, the average Canadian earned $81,703 in income

  • So we can stop here and conclude that canada is doing great right? at least in the sense that everyone is making significantly more money than in the past

  • No - we need to adjust for inflation as incomes have to rise just to keep pace with inflation (because a dollar today is nor worth as much as it was in the past)

  • We actually use the Consumer Price Index to adjust for inflation, we do this by choosing a year to serve as the reference.

  • Inflation, however, is not the only thing we must consider

Measuring/Operationalizing Income

• Once we adjust for inflation, we need to determine how to measure what is typical or normal, and there are two types of typical income measures:

  1. Average Income

  • Add up all scores and divide by the total number of scores (ex: an exam average)

  • But all of us that study income (economists, sociologists etc.) agree that it is NOT the best measure of income and often isnt even a good one for telling us what is typical for the majority of people

  • The problem with the average is that it is highly influenced by very high scores, instead we prefer …

    1. Median Income

  • The median is calculated by ranking all the scores from highest to lowest and reporting the middle number (so if there was 7 cases, you would rank them and report case #4)

  • Easy to remember, think of a street median

• Median income is often preferred as the measure of what is typical because really rich people like Bill Gates and Jeff Bezos who make millions a year pull the average up and everyone seems much richer than they actually are

Median & Average Household Income in Canada

• When choosing he median or average to report, what story someone wants to tell is often a deciding factor

• Ex: if a media outlet or politician wants to emphasize how well the region is doing, they will report the average income even though the median is more accurate. This is really important to know as you move forward in life because the average income is usually reported more and it often tells an inaccurate story

Types of Income

• Further we need to distinguish between different types of income

  1. Active Income

     • Income gained by exchanging time for money usually through a paid job or self-employment

  2. Passive Income

     • Passive income refers to income that is not tied to active labour. In other words, income you do not exchange time for and may actually require no time at all - hence the name "passive"

     • This typically takes the form of investing money in the stock market, real estate market (ex: landlord), in other businesses, etc.

Passive Income & The Stock Market

How does the stock market work?

• Companies raise money they need to grow their business by selling parts or "shares" of their company in the stock market. These are what stocks are, shares of ownership in a company

• People decide what companies to buy shares in and then the value of the share goes up and down depending on the company's value and reputation (i.e., people's willingness to buy the shares you own; in the same way that the value of anything you own, a house for example, depends on how much someone is willing to pay for it)

• It is not just companies that people buy shares into. They can also buy shares of commodities (ex. gold and silver), real estate, and bonds

• Bonds are just a fancy economics way of saying loan, buying a bond is basically giving a loan to a company or business that agrees to pay you interest over a set period of time in the same way you pay interest on a car or mortgage or just a credit card balance

• Why do you need to know about stock markets, bonds, etc? two reasons:

  1. You need to know this for life

     • Most people when they invest in stocks do so through a bank or other financial institution (i.e., you don’t need to be an expert), but we all participate in the stock market usually through our retirement plans and should know the basics of how it works

     • It is likely that you and your employer will pay into a retirement plan that you will rely on once you retire. Chances are that money will be invested in the stock market and so it is important you know at least the basics of it

  2. When people think of income inequality, they usually think of active or employment income and do not realize that the main way the rich stay rich is through passive income or, in other words, money they do not actually work for

     • (this is what made Marx so angry that he called for a worker revolution)

Concept: Allostatic Load --> the cumulative burden of chronic stress and live events; which has found that stress builds over time and weakens a person's  physical and mental health in lasting ways

The Matthew Effect - has nothing to do with active/job income, which is what most of us think of when we think of income and the wealthy.

The Matthew Effect

The Matthew Effect: advantages accumulates in ways that allow the rich to get richer

• For example: when one comes from advantage, they do not need to take loans and pay interest. They can instead invest their money to earn more. It is much easier to make money when you have money - ex: stock market, investing in property, and starting businesses

Tax as a Force for Equality

** Ascribed Status: attributes (advantages and disadvantages) assigned at birth

** Achieved Status: attributes (advantages and disadvantages) developed throughout life as a result of effort and skill

• Income has complicated status in terms of how fair it is

• Unlike gender, race, sexuality, and other ascribed statuses where we have no control over our status, when it comes to income most people do have an ability to affect income (at least once they are working age), which makes it an achieved status in the eyes of many

• Yet, the family we ae born into has significant effects on how well we do economically, which suggests strongly that income and wealth are not just determined by ones effort but also by factors outside of one's control (like family wealth)

• This is the justification for progressive taxation (i.e. increasing the amount of tax paid the higher ones income is). In this way, taxes act as a form of re-distributing wealth and promoting equality. In a sense, it tries to undo some of the advantages the wealthy have, and the disadvantages the non-wealthy face (for example, using taxes to provide free healthcare and education)

PART B: How Inequality has Changes in Canada Since 1980 & Why

** How do you think inequality has changed since roughly 1980? Is it better now, worse now, the same?

Changes in Canadian Inequality Over Time

• When we use average or median income as a whole, we are unable to distinguish how income changed for different groups of people

• One way to determine how income changed over time for people at different levels of socio-economic status is to use what we call Income Quintiles

• Quintiles divide the population into 5 groups:

  1. Top 20% of earners (80-100% group)

  1. Above average 20% (60-80% group)

  1. Middle or average 20% (40-60% group)

  1. Below average 20% (20-40% group)

  1. Bottom 20% of earners (0-20% group)

• This allows us to see how income changes for the top, bottom, and middle percent of earners

• The way we make quintiles, is just to order everyone in the group from highest to lowest (as we did with the median), then dividing them into the appropriate quintile group

• When looking at Canadian income changes since 1976 by quintile, we see there has been very little income gained at the bottom half of the distribution, and almost all of the growth has occurred at the very top

• Indeed, the top 20% of earners gain 54.3 times as much income as the bottom earners, and 5.3 times as much as the middle 20% of earners

• Perhaps taxes helped offset these gains versus them leading to larger inequality between rich and poor

• In order to see if this is true, we need to learn about two more types of income measures:

  1. Before Tax or Market Income

     • This is what we've been using so far, it is all of the income earned by a household or person

  2. After Tax Income

     • This is a measure of income AFTER taxes and transfers are paid. Since we have a progressive tax system where the more someone earns, the more tax they pay, looking at after-tax income is a better measure of the changes in inequality. It also looks at payments made to the poor like employment insurance and the Canadian Pension Plan

Measuring Income Inequality

• Gini Coefficient

  • One way we measure or operationalize inequality is with something called the GINI Coefficient

• The Gini coefficient ranges between 0 (or 0%) and 1 (or 100%)

• A score of 0 or 0% indicates that income is perfectly distributed in the country. In other words, every citizen of the country has an equal income and overall income is perfectly shared equally between everyone

• A score of 1 or 100% indicates that income is totally unequal. In other words, one person earns all the income and everyone else earns nothing

Scores Closer to zero indicate that the country is quite equal in terms of income inequality

Scores closer to 1 or 100% indicate that the country is quite unequal in terms of income inequality

How Has Economic Inequality Changed in Canada since 1980

• Market income inequality in Canada has grown tremendously in recent decades but especially since the late 1980s. Inequality is at the highest levels seen in 50 years.

• Before taxes, the Gini coefficient in Canada grew from 0.36 in 1976 to 0.43 in 2021

• After taxes and transfers, the Gini coefficient grew less yet still rose from 0.28 in 1975 to 0.31 in 2021

Why Did Inequality Grow So Much in Canada?

• Due to 3 main reasons

  1. The VERY rich became MUCH richer

     • Income inequality grew because top income earners have gained a greater share of income; i.e., their incomes are higher than they used to be

     • One of the reasons the rich have gained so much is due to rising CEO pay

     • With globalization (i.e. the ability to move production overseas and play countries against each other for tax breaks and other benefits) corporations are making more money than ever before

     • Globalization has meant workers have less leverage or ability to resist collectively due to greater competition with workers in other countries; this again increases corporate profit and decreases worker shares of profit

     • CEOs often get a share of this profit and are giving credit for the success of the corporation, both of which have greatly increased their wages

  2. Workers lost bargaining power over their employers due to the loss of unions (a product of globalization)

     • Workers have more power over their employer when they work together. For example, imagine one person or a few people going on strike versus everybody

     • And so to ensure they worked together, workers formed labour unions to cooperatively fight for their rights (ex: pension, holidays) and for higher pay

     • But due to globalization, we've seen the number of labour unions decrease substantially, which results in lower wages due to lack of bargaining power

     • The decline of unions is tied to globalization: you lose your leverage over your employer when they can move to another country quite easily

     • A worker's power is tied to how easy they are to replace, and now employers can replace Canadian workers with workers in another country quite easily (ex: apple had no problem finding equivalent workers in Ireland)

     • Today, the majority of strong unions that still exist are in public sectors like Teachers, Fire fighters, nurses and other healthcare workers, and so on

  3. Corporate consolidation (big companies forcing smaller ones to sell to them or go out of business) means fewer corporations and, therefore, fewer CEO's and owners that are richer

     • Back in the day there used to be a lot of small businesses

     • However because multi-national corporations have been able to grow so large and powerful due to globalization, they are able to put smaller businesses out of business or to threaten to put them out of business and thereby force them to sell to them

     • Another example is small businesses in small towns. In the past, there used to be small hardware and grocery stores. But when corporations like Walmart and Canadian Tire moved in they were able to sell goods for cheaper, and for this reason, drove small stores out of business

     • Small businesses not being able to compete with larger corporations means small businesses owners (middle to upper class people) became less common

     • Instead more money goes to corporations, which increases the amount of money that goes to corporate owners and CEOs

     • Further by controlling an entire industry like sunglasses or air travel, the companies that remain can work together to raise prices for the consumer. This is called an Oligopoly: when a market is dominated by a small number of sellers/producers, and it often results in competitors price-matching in mutually beneficial ways

Main Takeaways

1. Inequality in Canada has grown quite a bit since 1980, to the point that Canada can be considered among the more unequal developed countries in the world. The rich have been gaining a larger and larger share of all income

2. Because of the Matthew Effect and, specifically, passive income, children of the very rich, stay rich

3. Inequality has risen so much because of globalization

   • Corporations are able to move overseas and play countries and workers off of each other to their benefit (i.e. race to the bottom)

   • Additionally, there are fewer corporations because of corporate consolidation

   • Corporations because of these factors, are earning more than ever before and, since workers have less power to ask for a share of these new profits, it primarily goes to the CEOs and owners/shareholders

• This is a significant issue, but it is one that you may not have even noticed and the average canadian is not as upset about it as they probably should be. Remember, Canada used to be more equal economically

PART C: Why Aren't More People Mad About Rising Inequality?

Rising Inequality and the Lack of Recognition & Response

• Throughout history, when inequality grows in a way where the rich get very rich, and the poor get poorer people get very angry

• It has led to revolutions, riots, protests, and major social change throughout history

• Yet aside from the Occupy Wall Street protests after the housing crash (which was focused on a specific event, i.e., the 2008 crash), there has been very little political response to how much inequality has risen in recent decades in Canada

• Lets consider 2 reasons for inequality growing with little response:

  1. Most homes gained an extra income earner, and this was not seen as unfair or unequal but as societal progress towards Women's Rights (in other words, inequality grew but almost everyone's quality of life did too)

  2. Access to loans and debt has grown tremendously allowing access to the goods we want or need despite not having money for it (this increases the Matthew Effect)

** there are of course other reasons at play, but the keys are that people arent as mad as they might otherwise be because technically their lives got better in the terms of being able to access the goods they want (i.e., can buy what they desire). The above two reasons are why they can do that

1. Households Gained Extra Income

• People forget that a huge advantage (in terms of income at least) was gained by most families. Ex: the 1960s

  • In 1960, the median family income in 2024 dollars was roughly $54,000 and it took only one earner - only 25% of women worked in 1960. this one income was enough to live a good life; ex: buy two cars, a house without a big mortgage, raise two kids and even afford a yearly vacation

  • If you can live a great life on one income in 1960, they would have thought two incomes would be even better

  • The number of women entering the workforce did rise quickly and substantially

  • Yet household income did not rise that much

  • When we combine both men and women, we see the following change in individual income over time

    • The median individual income in canada went from $31,400 in 1976 to $30,450 in 2011. in other words, we all make less today than people did in 1976 after adjusting for inflation

    • What this means is that the primary reason Canadians have seen an increase in household income is because of the rise in dual earner families - i.e., because more family members are working

• Why didn’t wages grow?

  • Primarily because of globalization (companies shifting manufacturing overseas)

• Now, generally speaking, historically when people aren't making wage gains, they will get mad and start demanding higher wages through protests or elections

• Individual wages did not grow as much as the cost of goods (i.e. inflation) so technically our parents make less in their jobs than our grandparents (i.e. than their parents did) this usually would cause great dissatisfaction

• Despite our wages not growing however, people were still doing better as a family due to gaining a second income

• The womens rights movement made huge strides for gender equality and women's right to work and be paid equally. To be clear also, there is still work to do as today women only earn 89 cents for every dollar a man does in Canada, but it used to be much worse

• But think from an economic perspective, forget gender even exists for a second.

• In 1960 you could live a good life with just one income earner - now you need two

• If this trend continues, who do we start sending out for the third income we would need?

• Needing twice as many people in a family to work as we used to in order to maintain the same standard of living is bad, but we all accepted it  without demanding higher individual wages because it wasn’t seen as negative. Instead, it was seen as societal progress and women's rights.

1. Inequality Became Invisible

• So people accepted stagnant wages that did not rise because their household income rose as a result of women moving into the workforce. This is the first reason why people have not become upset at rising inequality. The second reason is that inequality became invisible

• It is tied to how much debt has risen in Canada over the last four decades

• We discussed income in part 1, but there is another part of economic inequality. That is wealth, and many people forget about wealth when thinking about the difference between rich and poor

1. Wealth

   • Refers to a person's Net Worth - i.e., their total assets (possessions, money in bank accounts, investments, pensions, etc) minus liabilities (Loans, debts, mortgages, etc)

Measuring Wealth

• There are three main components of wealth:

  1. Assets:

     • Examples: real estate value, vehicle value, cash on hand or in bank account, investments, retirement funds, value of other possessions (jewellery, electronics, etc.)

  2. Liabilities

     • Examples: typically just different kinds of debt such as mortgage, automobile, student loan, credit card debt, etc.

  3. Net Worth

     • Net worth = assets - liabilities

• Often times when we think of how rich people are we think of income and forget about people's wealth. People can have large amounts of one and small amounts of the other

Growth of Debt

• The problem with net worth and income is that each paint an incomplete picture on their own. You need to look at someone's finances holistically (both income and wealth) to understand how rich or poor they are

• Back in the day (our grandparents time), debt was viewed very poorly. You did not want to be in debt an those that had large debts were seen as desperate and irresponsible because interest on loans is not cheap

• Today most of us accept that we will spend most of our lives in debt - this is a new reality and has been driven primarily by the rise in student debt and the rise in home prices, but also by the rise in credit card debt

• Rising debt is important because it is a form of invisible inequality - i.e., an inequality that exists but is impossible to see unless someone tells you what their debt load is

Lecture Conclusions

• Inequality in canada has grown in the last 40 years. The rich have become much richer, and the average person's income has stayed the same without growth after inflation

• Stagnate incomes have not causes problems because families gained household income through the addition of another income earner (i.e. women's movement to the workforce)

• In addition, Canadian families have been able to still maintain the lifestyle they seek through rising debt and buying things with credit

• Rising debt has only exacerbated (i.e. made worse) the Matthew Effect due to things like loan interest payments

• This is an important trend to watch as if we stay on this path of stagnate incomes then we may reach crises. There is not really another family member to send to the workforce (barring adult children remaining at home) and debt levels are currently as high as they can sustainably be

• Based on current trends, we can expect income inequality to continue to grow in the next decade unless something is done

One Last Thing: Global Income Inequality

Measuring Poverty

• Absolute poverty: the lack of resources necessary for material well-being: food, water, housing, land, and health care

• Relative poverty: refers to a deficiency in material and economic resources compared with some other population

• Extreme poverty: living on less than $2.15 a day

Global Income Inequality

• 10% of the world's population or roughly 700 million people live in extreme poverty, i.e., live on less than $2.15 a day

• The richest 1% of adults (ages 20 and older) in the world own nearly half (48%) of global household wealth

• The richest 10% of adults own between 76-87% of total global wealth

• The poorest half of the world's adult population owns barely one percent of global wealth