Tuesday, May 1st, 2012 – A number of studies and organizations have pointed out lately that income inequality in this country is on the rise. But who has pointed out the fact that the poor are actually getting richer? On the occasion of International Workers’ Day, also known as May Day, the Montreal Economic Institute’s Yanick Labrie shines a light on five reasons why income inequality is less worrisome than it appears to be, in an Economic Note published today.
1. Income growth for the poor
From 1995 to 2009, a period marked by rising inequality, average after-tax income for the poorest Canadian households increased by 23%, while it had almost stagnated during the previous period (1976-1995), even though this earlier period was characterized by less inequality.
2. Poverty is temporary
From 2005 to 2009, 43% of those in the bottom income quintile moved into a higher income category. Moreover, only 2.1% of people remained below the low income cut-off every year from 2002 to 2007.
3. Income gaps are overestimated due to household size
Studies of income gaps use household income as the basis for comparison. Increasing inequality, however, stems in large part from a social change. The number of single-parent families is increasing, and these types of families tend to be less affluent. An adjustment carried out by Statistics Canada to make households more comparable reduces inequality by 30%.
4. Consumption gaps show little change
Insofar as people’s primary concern is their ability to use their incomes to acquire the goods and services that will allow them to maintain their desired standard of living, the use of a measure of consumption levels is more appropriate than a measure of income. Consumption inequality has changed very little over the last thirty years.
5. Data quality
Studies of income inequality usually rely on statistics gathered from income tax statements. These data, however, are likely to be distorted, especially due to the amount of income that is not fully declared.
“In Canada, people have the opportunity to improve their economic conditions and lift themselves out of poverty. It is to defend this social mobility that social groups should man the barricades, instead of focusing merely on income inequality statistics,” concludes Mr. Labrie.
The Economic Note entitled Should We Worry about Income Gaps?, prepared by Yanick Labrie, economist at the MEI, can be consulted free of charge on our website.
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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and educational organization. Through its publications and conferences, the MEI stimulates debate on public policies in Quebec and across Canada by proposing wealth-creating reforms based on market mechanisms.
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