Inequalities that make a difference

Inequalities of income are all the rage right now, due to Thomas Piketty’s unexpected fame and with some groups bemoaning the high salaries of top Canadian CEOs. Yet social mobility in Canada is so high that it dwarfs income inequalities. Only 1.5 per cent of all Canadians remained below the low income cut-off for the entire 2005-2010 period. Inequalities of income are not a crucial metric at a time when poverty is less and less of a permanent condition. What’s more important is that everyone becomes better off over time.

Economist Deirdre McCloskey calls this the Great Fact. While humans had been confined to crushing poverty for 99.7 per cent of our species’ existence, about 200 years ago standards of living started taking off, and parents could finally hope that their offspring would live better lives than they did. McCloskey’s conservative estimate is that we have become richer by a factor of 16 since then. We owe this Great Fact not to the denunciation of inequalities, but to entrepreneurship and innovation, and to the fact that we started considering these two things as virtuous.

Yet, there are some important inequalities. They are the ones that hamper social mobility, and create an injustice that won’t be solved through growth. When the law privileges some groups of people at the expense of others, we get the kind of inequality that slows down innovation and entrepreneurship, and hence our continued progress.

One such inequality has to do with occupational licensing. These barriers to entry can take the form of money, time, or both. About 20 per cent of occupations are regulated by a licensing body in Canada. You need a license to be an interior designer in Alberta, for example, or a hairstylist or homeopathy practitioner in Ontario, or an aromatherapist anywhere in Canada. Setting aside the question of whether government’s approval is necessary for ensuring that Canadians are getting the right patchouli incense mix for their relaxation sessions, these regulated professions create a privileged class of insiders whose very raison d’être is to keep outsiders from practicing their trade, much like the medieval guild system.

Another system of legal inequality is that of labour unions. Unionized workers obtain higher wages and benefits by virtue of their government-granted privileges. But these bonuses have a cost, and are obtained at the expense of those who are pushed out of the labour force. By being forced to increase salaries over their market clearing rates, companies with unionized workers are led to employ less labour and more capital, thus redistributing income in favour of union members at the expense of the unemployed. This is made possible by the intervention of government, lending its strong arm to the preferential treatment of labour unions.

Some of these legally privileged classes are now being challenged by new technologies. Uber, for instance, is challenging taxi privileges that were specifically designed with the sole intention of keeping newcomers out of the business, thereby raising incomes for insiders. Now any immigrant, single parent, or unemployed person can enter this trade, and generate a return on their investment in his or her car.

Another newcomer democratizing an occupation that had become ossified and over-institutionalized is Airbnb and similar apartment-sharing apps. By connecting travellers with people with a guest room, a sofa bed, or an inflatable mattress, it has democratized travel for those with more modest means. So much so, in fact, that hotel trade associations are ramping up their offensive against bunk sharing. Here the barriers are not so much licenses, as the compliance costs associated with invasive regulation.

But hotels and taxis are the ones who have been demanding regulation with high costs to run smaller competitors out of business. Now that competitors can easily evade these regulations, these high costs have turned against them. If everyone should be put on the same level, it should be through lower taxes and less regulation, not through the reinforcement of regulatory barriers that create inequalities of treatment.

These are just a few examples of inequalities due to the government, not market forces or economic laws, actively favouring some people and creating an underclass of less privileged citizens elsewhere. If we concentrated on the inequalities that count, Canadians could become even more socially mobile than they already are, and poverty even less permanent.

Mathieu Bédard is Economist at the Montreal Economic Institute. The views reflected in this op-ed are his own.