ECON 361: Income Distributions and Problems of Inequality

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1 ECON 361: Income Distributions and Problems of Inequality David Rosé Queen s University January 29, /1

2 Last class... Taxes and Transfers The Tale of the Tails Today... Assignment 1 posted Inequality in Canada Wealth Inequality by Province Canadian Inequality: Recent Developments and Policy Options 2/1

3 Assignment 1 is Live! Posted on the website - you can also find a guide to Question 4 (Stata) Stata Tutorials: Jan. 30th (tomorrow) from 10:00 to 11:30am Feb. 2nd (Friday) from 4:00 to 5:30pm 3/1

4 Wealth Inequality by Province (Chawla, 2004) Motivation: please! fill me in Methodology me too 4/1

5 Wealth Inequality: some basics What is it? How does it differ from income inequality? 5/1

6 Why is wealth inequality interesting? Income measures short-term flows that affect consumption and saving. Wealth measures surplus accumulated by families. It might be a better indicator of long-run well-being. Defining Wealth: Main breakdown is between marketable components that can be traded and transfered across people Savings accounts, stocks, bonds, real estate, durable goods, etc. 2. non-marketable components that can t be bought and sold for their NPV. Namely, employer pension plans (only employees and their survivors can draw from the plan) 6/1

7 Wealth inequality by province Wealth inequality by province Table 1: Family wealth by income decile Canada N.L. P.E.I. N.S. N.B. Que. Ont. Man. Sask. Alta. B.C. % Total Table 1: Family wealth by income decile Lowest Second Canada 0.2 N.L. 0.2 P.E.I. 0.2 N.S. 0.3 N.B. 0.2 Que. 0.2 Ont. 0.2 Man. 0.3 Sask. 0.3 Alta. 0.2 B.C. 0.1 Third Fourth % Fifth Total Sixth Lowest Seventh Second Eighth Third Ninth Fourth Highest Fifth Sixth Mean Seventh wealth $ Lowest Eighth decile -6, , , , , , , , , , , Highest Ninth decile 1,320, , ,029, , , ,184, ,386, ,084, ,067, ,422, ,542, Highest Mean income Lowest Mean wealth decile 6,200 6,900 8,000 6,300 6,900 5,700 $ 7,600 7,600 5,000 6,200 4,000 Highest Lowest decile decile 151,200-6, ,000-15, ,500-5, ,000-4, ,200-6, ,000-9, ,500-6, ,100-5, ,300-6, ,700-4, ,300-7,600 Highest decile 1,320, ,500 1,029, , ,000 1,184,800 1,386,700 1,084,100 1,067,000 1,422,800 1,542,600 % Families Mean income Total Lowest wealth decile 6, , , , , , , , , , , Total income /1 Highest decile 151, , , , , , , , , , ,300

8 Some stylized facts: If we look at the lowest decile, these families had negative wealth (i.e. they were, on average, in debt). The share of wealth held by the top 10% varied between 42% in Nova Scotia to 52% in Alberta. In the top decile, most families had over $1,000,000. 8/1

9 The wealth gap between top and bottom deciles was smallest in Newfoundland and Labrador, and largest in British Columbia. 9/1

10 More stylized facts Wealth inequality is, in general, much higher than income inequality (just look at the Theil indices). The share of wealth held by each decile is increasing in the deciles. 10/1

11 Based on the Theil index, inequality is highest in Alberta and British Columbia and lowest in Nova Scotia and Saskatchewan. 11/1

12 British Columbia. 45% for those with incomes of $100,000 or more Table 2: Wealth inequality by selected family characteristics* Canada N.L. P.E.I. N.S. N.B. Que. Ont. Man. Sask. Alta. B.C. Total inequality (Theil s T) Pre-tax income % Between groups Within groups Homeownership Between groups Within groups Age of major income recipient Between groups Within groups Employer pension plan Between groups Within groups Business ownership Between groups Within groups Source: Survey of Financial Security, 1999 *Excludes families with negative or zero wealth. September 2004 PERSPECTIVES 16 Statistics Canada Catalogue no XIE 12/1

13 Wealth inequality by province Table 3: Decomposition of wealth inequality* Canada N.L. P.E.I. N.S. N.B. Que. Ont. Man. Sask. Alta. B.C. Total inequality (Theil s T) Between groups Income Homeownership Business ownership Interaction term Within groups Source: Survey of Financial Security, 1999 * Excludes families with negative or zero wealth. % Data source and definitions The analysis is based on the Survey of Financial Security (SFS), conducted between May and July The sample consisted of 23,000 dwellings from the 10 provinces 21,000 from a regular area sample and 2,000 from of the methodology used to estimate such savings can be found in Survey of Financial Security: Methodology for estimating the value of employer pension plan benefits (Statistics Canada catalogue no. 13F0026MIE Em- 13/1

14 a higher rate of business ownership as well as a higher ation in family income across the country. However, Table 4: Share of provincial wealth inequality by selected family characteristics* Canada N.L. P.E.I. N.S. N.B. Que. Ont. Man. Sask. Alta. B.C. Total wealth Share (%) inequality Pre-tax income Distribution (%) Under $25, $25,000 - $49, $50,000 - $99, $100,000 and over Homeownership status Renter Owner Without mortgage With mortgage Age of major income recipient Under to and over Employer pension plan No Yes Business ownership No Yes Source: Survey of Financial Security, 1999 * Excludes families with negative or zero wealth. September 2004 PERSPECTIVES 18 Statistics Canada Catalogue no XIE 14/1

15 Some findings: Wealth is more unequally distributed than income. (shocking!) In six provinces homeownership ranked higher than income in explaining wealth! Employer pension plans are associated with quite a lot of wealth inequality. 15/1

16 Canadian Inequality (Fortin et al., 2012) Motivation: please! fill me in Methodology me too 16/1

17 FIGURE 1 Canadian Inequality Trends Gini Coefficient Year Market Income Disposable Income Source: Statistics Canada, CANSIM Table /1

18 Some observations: 1. Market income inequality has increased between 1980 and In 1980 the top 20% of income earners received 45% of total income earnings. This increased to 52% in Inequality has a tendency to increase during recessions. People at the lower end of the distribution tend to be affected disproportionately by a weak labour market. 3. After-tax-and-transfer income exhibits significantly less inequality than the pre-tax income (due to tax/transfer system). 4. Frenette, Green and Milligan (2009) argue that the tax system was not inherently progressive to begin with. = political will to respond to inequality led to increased redistribution. 18/1

19 FIGURE 2 Changes in Log Weekly Wage by Percentile Changes from 1980 to Log Weekly Wage Differential Quantile Males Females Source: Authors calculations from census data from Green and Sand (2011). 19/1

20 Wages at the top of the distribution grew much more than wages at the bottom. The growth in women s wages was larger than that of men s at every point in the distribution. 20/1

21 FIGURE 3 Changes in Log Hourly Wages by Percentile A. Changes from to Log Wage Differential Quantile Males Females B. Changes from to /1

22 To analyze recent developments in inequality in Canada the authors use data from the Labour Force Survey (hourly wages). From : For both men and women, wages at the top increased more than wages at the bottom. Women s wages rose more than men s. 22/1

23 Quantile B. Changes from to Log Wage Differential Quantile Males Females Source: Authors calculations using hourly wages from the Labour Force Survey from Deflated using the monthly CPI series V from CANSIM. 23/1

24 From : Real wages grew approx. 6% for men and 8% for women. Wages increased more at the bottom than the top. 24/1

25 25/1 FIGURE 4 Share of Total Income in Canada, Richest 1 Percent 20% 18% 16% 14% 12% 10% 8% 6% Year Source: Saez and Veall (2005), updated using data provided by Michael Veall, 4 April 2012.

26 Test your intuition! Who are the 1 percent? (2006 census data) 1. Annual income to be in the club? 2. % of 1-percenters that are male? 3. Average income within the top 1 percent? 4. % of 1-percenters that have completed at least a bachelor s degree? 5. Occupational breakdown: 5.1 Finance and insurance? 5.2 Senior managers and CEOs? 5.3 Physicians, Vets, and Dentists? 5.4 Other (public servants, entrepreneurs,...)? 26/1

27 TABLE 1 Characteristics of Top Income Earners (Top 1 Percent), 2006 Canadian Census Top 1% All Individuals Mean income $452,887 $36,837 Share of employment income 69.9% 82.7% Men 82.7% 48.4% Work 50 hours or more a week 52.2% 18.6% Education Less than a bachelor s degree 41.8% 81.0% Bachelor s degree 28.1% 12.3% Medicine, dentistry, veterinary 8.4% 0.5% Other post-graduate degrees 21.7% 6.2% Age groups Under % 28.8% % 54.5% Over % 16.7% Selected occupations Senior management 14.1% 0.9% Other management 19.1% 6.1% Professionals in health 11.6% 2.0% Prof. business and finance 7.1% 1.8% Selected industries Mining, oil, and gas 4.6% 1.0% Finance and insurance 10.0% 3.0% Prof., scientific, and technical 15.8% 4.9% Note: Authors calculations based on the public use files of the 2006 Census. Sample size is 656,884 individuals age 15 and above. The 99th percentile of the income distribution is $230,000. The top 1 percent includes all individuals earnings $230,000 and more. The selected occupations and industries are those with the highest fraction of workers in the top 1 percent. 27/1

28 Some facts: Average income amongst the top one percent is $450,000 (min is $230,000). 83% of the top one percent are men. Education matters, but hard work pays off. Finance and insurance accounts for just 10% of the top 1%. 28/1

29 Factors that could affect inequality: Education Age Minimum wage Unions Technological change Gender 29/1

30 FIGURE 5 Women s Labour Force Participation and Gender Pay Ratio 80% 75% 70% 65% 60% 55% 50% 45% 40% Year Labour Force Participation Rate Female/Male Average FTFY Earnings (Women Age 15 to 64) Source: Authors calculations from the following CANSIM series: V , the participation rate of females, 15 to 64 years; V and V , the average earnings of full year, full time workers, females and males, respectively. 30/1

31 FIGURE 6 Female-to-Male Hourly Wage Ratio 100% 90% 80% 70% 60% 50% 40% Year 10th percentile 50th percentile 90th percentile Source: Hourly wage calculated from the Survey of Consumer Finances and and from the Labour Force Survey from In the SCF, the hourly wage ratio is computed for a restricted sample of workers who report being with the current employer for more than one year. 31/1

32 Policy options: 1. Use the tax and transfer system to redistribute income and to curb the increasing trends in market inequality. Increase marginal tax rate for highest earners. Increase refundable tax credits/benefits for lowest earners. 2. Directly influence the pre-tax distribution of income. Increase the minimum wage. Increase educational attainment, particularly high school graduation rate. Collect better (and more up to date) information about different labour markets to help inform university students. 32/1

2017 Alberta Labour Force Profiles Youth

2017 Alberta Labour Force Profiles Youth Highlights Population Statistics Labour Force Statistics 4 th highest proportion of youth in the working age population 1. 16.3% MB 2. 15.3% ON 2. 15.2% SK 4. 14.9%