John Myles

Income Inequality and Democracy

The news is now in: Family income inequality has risen substantially in Canada since the beginning of the 1990s.

Is inequality rising because more Canadians have developed a taste for "freeriding"? Hardly.

Canadian employment rates and annual hours worked per worker have reached historic highs. The employment of single moms rose from 61 to 73 percent between 1980 and 2000 and those working almost full-year (40+ weeks) rose from 42 to 56 percent.

Instead, the winners and losers in Canada's economic sweepstakes are mainly the result of historical luck.

Today's CEOs are earning exorbitant salaries because they happened to be born later than their predecessors of the 1970s, not because of any new-found managerial wizardry.

The earnings of less skilled and younger workers have fallen because of changes in supply and demand for their labour.

Family income inequality has risen because of higher rates of non-marriage and marital dissolution and increased selectivity of marriage based on education. Large changes of this sort are partially under human control and partly the result of chance processes. They are "aggregative outcomes" that depend on decisions made by all individuals but not on the decision of any particular individual. The winners and losers are winners and losers as a result of millions of small decisions made by others rather than as a result of their own efforts and decisions.

If the winners and losers are merely a result of luck, why bother to do anything about it?

One reason is democracy. Political majorities in all rich democracies express deep concern about "too much inequality" and expect governments to take a hand in doing something about it. Fortunately for markets, the people are right.

In Canada, governments have been ambiguous but not indifferent toward these new inequalities. They have demonstrated a renewed interest in compensating those who are truly unlucky and taken important initiatives to limit inequalities at the bottom half of the income distribution.

The magic concept here is "social inclusion" which in practice means limiting differences between those in the middle and those at the bottom while largely ignoring growing inequalities between the middle and the top.

One of the main policy expressions of the social inclusion strategy is the very dramatic growth in negative income tax style programs such as the Child Tax Credit that have flourished in all of the Anglo-Saxon countries.

Unfortunately, a social inclusion strategy based on helping those at the bottom keep up with the middle is not a very ambitious one given actual trends in the income distribution. There has been only modest change in incomes at the bottom relative to the middle since 1990. As a result, there has been little change in the Canadian poverty rate for decades.

Most of the rise in inequality is the result of a growing gap between families at the top of the distribution and those in the middle. While higher income families have seen their earnings surge, earnings of middle- and low-income Canadians have stagnated.

So why not leave well enough alone and simply let the winners at the top enjoy their good "luck"?

Martin Feldstein, a leading U.S. economist and former advisor to President Reagan, has argued that so long as the poor are not made worse off, we should not object to a rise in inequality produced by growing incomes for those at the top. In contrast, moral philosophers such as John Rawls argue that a "just society" is one where changes work for the least advantaged (the poor). Rawls' main idea is that a rise in inequality is justified if the poor are better off as a result. But even changes that improve the situation of the poor can lead to surprising outcomes. Consider the hypothetical changes in household income in Inequality Land adapted from my colleague Lane Kenworthy.

In this example, average incomes grow dramatically over time but so does inequality since most of the gains are going to the top third of all families (the "rich"). Nevertheless, at the end of the cycle, the poor (or bottom third) are also twice as well off as they were at the start of the process. Notice, moreover, the poorest third is better off not only in absolute terms but also relative to the middle, which is the usual way we measure poverty. Consequently, poverty rates have declined.

Despite the rising living standards of the poor, I suspect many of us would think something is askew here. Inequality, not just poverty, matters. Why so? If I were observing trends in Inequality Land, I would suspect I was observing a failed democracy. And I place a high value on democratic political institutions. As T.H. Marshall pointed out many years ago, the mix of a market, economy and a democratic polity as the defining institutions of our contemporary world is a paradox.

Democracy, by definition, is egalitarian ("one person, one vote"): rights are attached to people, not to their property. Markets, by contrast, are driven by inequality ("one dollar, one vote") and, by definition, generate more inequalities. In the 19th century, it was widely believed that mass democracy would destroy markets: the "many" would simply use their political power to expropriate the wealth of the "few" and markets would collapse. That never happened. Why so?

One reason is that despite their failures, market economies have proved quite effective at producing wealth. And while markets are not very good at distributing wealth, democratic political institutions have shown they can compensate. That's why we have public health care, old age pensions, unemployment insurance, and income support for families. Markets aren't very good at that sort of thing. Markets need democracy to make market economies viable for people. Quite reasonably, more economic growth isn't of much interest to the bottom half of the electorate if all of the gains are going to the top half.

But public pensions, universal health care and most of our other social programs of note are the product of the democracy we had in the 1960s.

Times have changed, and as the inequality trends indicate, Canadians face new distributive challenges. This is no time to rest on the laurels of those who preceded us. The viability of our society requires efficient markets; but it also requires effective democracy.

John Myles is Canada Research Chair and professor of Sociology at the University of Toronto.

snagged from "The Growing Gap" "Why inequality matters" paper.

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