Governments need will to fix growing inequality

The Occupiers have packed their tents, but the issue of increasing inequality within Canada shouldn't go away with them.

The Organization for Economic Cooperation and Development reported this week that income inequality continues to increase in Canada and around the world.

And it warns trouble lies ahead. "The economic crisis has added urgency to the debate," its report said. "The social contract is starting to unravel in many countries."

Disenfranchised youth "have now been joined by protesters who believe they are bearing the brunt of a crisis for which they have no responsibility while people on higher incomes appear to have been spared."

The OECD analysis debunks the myth that growing inequality is the result of market forces or some inevitable new order. Government policies have ensured that those with high incomes claim a larger share of the country's wealth, while the poor receive a smaller proportion.

The average income of the bottom 10 per cent of Canadians in 2008 was $10,260; the average income of the top 10 per cent of was $103,500. The top 10 per cent had an average income 10 times greater than those at the bottom; in the early 1990s their incomes were only eight times greater.

The richest one per cent of Canadians shared 13.3 per cent of total income in 2007, up from 8.1 per cent in 1980. And the richest one-tenth of one per cent of Canadians - about 13,000 households - claimed 5.3 per cent of all income in Canada. That's more than twice as much as the share they received in 1980.

The growing gap starts with greater wage inequality. Partly, that does reflect market forces. Technological change has seen high-skilled workers benefit more than those with fewer skills.

But provincial and federal government policies have also increased inequality. Canadian governments have promoted part-time work or flexible hours and eased employment standards. The changes improved productivity and brought more people into work, but "the rise in part-time and low-paid work also extended the wage gap," the OECD found.

Canadian governments have played a more direct role in widening the income gap. Tax and benefit policies can narrow, or widen, the gap.

In Canada, they now reduce inequality less than in most of the OECD's 34 member countries.

That reflects choices by government. "Prior to the mid-1990s, the Canadian tax-benefit system was as effective as those in the Nordic countries in stabilizing inequality, offsetting more than 70 per cent of the rise in market income equality," the report found. "The effect of redistribution has declined since then: Taxes and benefits have only offset less than 40 per cent of the rise in inequality."

Tax cuts, for example, have delivered the greatest benefits to the rich - in B.C., income tax cuts have delivered an average benefit of $9,000 a year to the richest 10 per cent of households, while saving the poorest 10 per cent an average $200.

The theory was that everyone would benefit.

It hasn't worked, says OECD secretary-general Angel Gurría. "This study dispels the assumptions that the benefits of economic growth will automatically trickle down to the disadvantaged and that greater inequality fosters greater social mobility," he said. "Without a comprehensive strategy for inclusive growth, inequality will continue to rise."

The OECD offers potential solutions. A greater investment in education, starting in early childhood and continuing into the adult years, would help people improve their job prospects and incomes.

Benefit polices need to be improved. "Large and persistent losses in low-income groups following recessions underline the importance of government transfers and well-conceived income support policies," the report says.

The growing share of income going to top earners means they can afford to pay more in taxes; governments should review tax policies "to ensure that wealthier individuals contribute their fair share."

And "the provision of freely accessible and high-quality public services, such as education, health and family care is important," the OECD says.

But before anything happens, we have to decide that the increasing gap is undesirable. And we have to recognize that government policies have played a significant role in increasing inequality, and can do just as much to reduce it.