ECON 361: Income Distributions and Problems of Inequality David Rosé Queen s University January 29, 2018 1/1
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
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
Wealth Inequality by Province (Chawla, 2004) Motivation: please! fill me in Methodology me too 4/1
Wealth Inequality: some basics What is it? How does it differ from income inequality? 5/1
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... 1. 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
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 100.0 by 100.0 income 100.0 decile100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Lowest -0.3-1.2-0.3-0.2-0.4-0.3-0.2-0.2-0.3-0.2-0.2 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 0.8 1.5 0.8 1.3 1.1 0.7 0.9 1.1 1.2 0.9 0.5 Fourth 2.0 2.9 1.9 2.8 2.4 % 1.8 2.1 2.4 2.5 2.1 1.5 Fifth Total 100.0 3.4 100.0 4.3 100.0 3.5 100.0 4.5 100.0 3.9 100.0 3.2 100.0 3.8 100.0 4.0 100.0 4.4 100.0 3.6 100.0 3.1 Sixth Lowest -0.3 5.5-1.2 6.0-0.3 5.3-0.2 6.6-0.4 5.6-0.3 5.1-0.2 5.8-0.2 6.3-0.3 6.5-0.2 5.4-0.2 5.5 Seventh Second 0.2 8.1 8.5 0.2 7.9 0.2 9.3 0.3 7.9 0.2 7.9 0.2 8.6 0.2 8.9 0.3 9.0 0.3 7.6 0.2 8.2 0.1 Eighth Third 12.1 0.8 11.6 1.5 12.5 0.8 13.7 1.3 11.8 1.1 11.5 0.7 12.9 0.9 12.4 1.1 13.3 1.2 10.8 0.9 12.2 0.5 Ninth Fourth 18.8 2.0 17.7 2.9 19.9 1.9 19.7 2.8 18.7 2.4 18.3 1.8 19.1 2.1 18.6 2.4 20.1 2.5 17.3 2.1 18.3 1.5 Highest Fifth 49.4 3.4 48.5 4.3 48.3 3.5 42.0 4.5 48.8 3.9 51.6 3.2 46.8 3.8 46.2 4.0 43.0 4.4 52.3 3.6 50.8 3.1 Sixth 5.5 6.0 5.3 6.6 5.6 5.1 5.8 6.3 6.5 5.4 5.5 Mean Seventh wealth 8.1 8.5 7.9 9.3 7.9 7.9 $ 8.6 8.9 9.0 7.6 8.2 Lowest Eighth decile -6,700 12.1-15,100 11.6-5,900 12.5-4,300 13.7-6,900 11.8-9,300 11.5-6,200 12.9-5,500 12.4-6,200 13.3-4,300 10.8-7,600 12.2 Highest Ninth decile 1,320,900 18.8 611,500 17.7 1,029,300 19.9 845,900 19.7 846,000 18.7 1,184,800 18.3 1,386,700 19.1 1,084,100 18.6 1,067,000 20.1 1,422,800 17.3 1,542,600 18.3 Highest Mean income 49.4 48.5 48.3 42.0 48.8 51.6 46.8 46.2 43.0 52.3 50.8 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 151,200-6,700 115,000-15,100 121,500-5,900 119,000-4,300 106,200-6,900 137,000-9,300 163,500-6,200 134,100-5,500 126,300-6,200 172,700-4,300 146,300-7,600 Highest decile 1,320,900 611,500 1,029,300 845,900 846,000 1,184,800 1,386,700 1,084,100 1,067,000 1,422,800 1,542,600 % Families Mean income 100.0 1.6 0.4 3.1 2.5 25.5 36.7 3.7 3.3 9.5 13.8 Total Lowest wealth decile 6,200 100.0 6,900 0.8 8,000 0.4 6,300 2.3 6,900 1.8 5,700 21.0 7,600 40.6 7,600 3.1 5,000 3.2 6,200 10.3 4,000 16.5 Total income 100.0 1.3 0.4 2.6 2.0 23.0 40.9 3.4 2.9 10.2 13.5 7/1 Highest decile 151,200 115,000 121,500 119,000 106,200 137,000 163,500 134,100 126,300 172,700 146,300
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
The wealth gap between top and bottom deciles was smallest in Newfoundland and Labrador, and largest in British Columbia. 9/1
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
Based on the Theil index, inequality is highest in Alberta and British Columbia and lowest in Nova Scotia and Saskatchewan. 11/1
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) 0.865 0.748 0.755 0.634 0.767 0.918 0.761 0.826 0.647 0.990 0.984 Pre-tax income % Between groups 23.4 34.3 27.7 23.8 23.7 29.2 21.2 26.4 23.5 20.4 19.8 Within groups 76.6 65.7 72.3 76.2 76.3 70.8 78.8 73.6 76.5 79.6 80.2 Homeownership Between groups 29.0 15.9 35.2 17.1 21.8 27.4 37.5 30.0 29.8 19.6 30.5 Within groups 71.0 84.1 64.8 82.9 78.2 72.6 62.5 70.0 70.2 80.4 69.5 Age of major income recipient Between groups 10.5 6.5 8.3 11.7 10.7 11.7 13.0 6.5 8.4 5.0 11.9 Within groups 89.5 93.5 91.7 88.3 89.3 88.3 87.0 93.5 91.6 95.0 88.1 Employer pension plan Between groups 4.2 11.4 5.0 10.2 10.1 4.5 6.1 2.3 2.3 3.6 1.1 Within groups 95.8 88.6 95.0 89.8 89.9 95.5 93.9 97.7 97.7 96.4 98.9 Business ownership Between groups 10.5 6.5 16.1 7.8 18.7 13.8 6.6 9.6 14.1 16.8 9.8 Within groups 89.5 93.5 83.9 92.2 81.3 86.2 93.4 90.4 85.9 83.2 90.2 Source: Survey of Financial Security, 1999 *Excludes families with negative or zero wealth. September 2004 PERSPECTIVES 16 Statistics Canada Catalogue no. 75-001-XIE 12/1
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) 0.865 0.748 0.755 0.634 0.767 0.918 0.761 0.826 0.647 0.990 0.984 Between groups 49.0 49.2 65.9 41.8 51.0 54.7 52.8 53.4 54.2 45.6 51.5 Income 18.0 46.5 17.8 10.4 20.7 21.3 14.9 16.8 14.5 16.5 11.7 Homeownership 20.5 11.2 27.9 13.9 18.5 17.2 28.1 21.5 22.9 13.7 24.5 Business ownership 5.1 3.7 10.4 4.2 8.9 8.3 3.5 5.5 7.9 11.5 7.2 Interaction term 5.4-12.2 9.8 13.3 2.9 7.9 6.3 9.6 8.9 3.9 8.1 Within groups 51.0 50.8 34.1 58.2 49.0 45.3 47.2 46.6 45.8 54.4 48.5 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 1999. 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-01003. Em- 13/1
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 100.0 0.1 0.3 0.8 0.9 17.4 40.6 2.3 2.3 12.9 22.3 Pre-tax income Distribution (%) Under $25,000 1.8-5.8 3.1 6.5-2.6 0.6 1.6-3.3 0.7 1.3 4.8 $25,000 - $49,999 8.3 5.0 17.2 11.5 32.7 10.3 7.0 8.1 17.5 3.7 8.4 $50,000 - $99,999 39.1 59.1 24.8 45.5 38.9 44.2 34.0 56.6 42.6 49.1 33.1 $100,000 and over 50.9 41.8 54.9 36.5 31.1 44.9 57.4 38.6 39.2 45.9 53.7 Homeownership status Renter -0.5-3.5-4.8 8.6 0.1 5.7-5.2-2.1-5.8 1.3 0.5 Owner Without mortgage 78.8 81.1 103.3 74.1 87.2 76.2 84.8 91.7 91.4 53.9 84.0 With mortgage 21.7 22.5 1.4 17.3 12.8 18.0 20.4 10.4 14.4 44.8 15.5 Age of major income recipient Under 45 16.0 7.4 9.4 1.2 16.5 12.8 7.1 31.4 17.9 44.9 16.9 45 to 64 60.6 42.8 64.7 67.2 68.0 72.0 63.5 44.8 56.8 35.0 61.8 65 and over 23.4 49.8 25.9 31.6 15.4 15.1 29.4 23.8 25.3 20.1 21.3 Employer pension plan No 43.9 28.5 50.8 28.7 30.9 47.3 30.9 52.0 44.8 38.6 69.2 Yes 56.1 71.6 49.2 71.3 69.1 52.7 69.1 48.0 55.2 61.4 30.8 Business ownership No 33.2 62.1 26.0 55.7 33.5 32.9 42.9 35.0 25.8 10.3 27.0 Yes 66.8 37.9 74.0 44.4 66.5 67.1 57.1 65.0 74.2 89.7 73.0 Source: Survey of Financial Security, 1999 * Excludes families with negative or zero wealth. September 2004 PERSPECTIVES 18 Statistics Canada Catalogue no. 75-001-XIE 14/1
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
Canadian Inequality (Fortin et al., 2012) Motivation: please! fill me in Methodology me too 16/1
FIGURE 1 Canadian Inequality Trends 0.5 0.45 Gini Coefficient 0.4 0.35 0.3 0.25 1976 1981 1986 1991 1996 2001 2006 2011 Year Market Income Disposable Income Source: Statistics Canada, CANSIM Table 202-0709. 17/1
Some observations: 1. Market income inequality has increased between 1980 and 2007. In 1980 the top 20% of income earners received 45% of total income earnings. This increased to 52% in 2007. 2. 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
FIGURE 2 Changes in Log Weekly Wage by Percentile Changes from 1980 to 2005.4.3 Log Weekly Wage Differential.2.1 0.1.2 0.2.4.6.8 1 Quantile Males Females Source: Authors calculations from census data from Green and Sand (2011). 19/1
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
FIGURE 3 Changes in Log Hourly Wages by Percentile A. Changes from 2001 01 to 2005 06.2.15 Log Wage Differential.1.05 0.05.1 0.2.4.6.8 1 Quantile Males Females B. Changes from 2005 06 to 2010 11.2.15 21/1
To analyze recent developments in inequality in Canada the authors use data from the Labour Force Survey (hourly wages). From 2000-2005: 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
0.2.4.6.8 1 Quantile B. Changes from 2005 06 to 2010 11.2.15 Log Wage Differential.1.05 0.05.1 0.2.4.6.8 1 Quantile Males Females Source: Authors calculations using hourly wages from the Labour Force Survey from 2000 11. Deflated using the monthly CPI series V41690973 from CANSIM. 23/1
From 2005-2010: Real wages grew approx. 6% for men and 8% for women. Wages increased more at the bottom than the top. 24/1
25/1 FIGURE 4 Share of Total Income in Canada, Richest 1 Percent 20% 18% 16% 14% 12% 10% 8% 6% 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Year Source: Saez and Veall (2005), updated using data provided by Michael Veall, 4 April 2012.
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
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 35 4.5% 28.8% 35 64 79.0% 54.5% Over 64 16.5% 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
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
Factors that could affect inequality: Education Age Minimum wage Unions Technological change Gender 29/1
FIGURE 5 Women s Labour Force Participation and Gender Pay Ratio 80% 75% 70% 65% 60% 55% 50% 45% 40% 1975 1980 1985 1990 1995 2000 2005 2010 Year Labour Force Participation Rate Female/Male Average FTFY Earnings (Women Age 15 to 64) Source: Authors calculations from the following CANSIM series: V2461672, the participation rate of females, 15 to 64 years; V1542060 and V1542064, the average earnings of full year, full time workers, females and males, respectively. 30/1
FIGURE 6 Female-to-Male Hourly Wage Ratio 100% 90% 80% 70% 60% 50% 40% 1980 1985 1990 1995 2000 2005 2010 Year 10th percentile 50th percentile 90th percentile Source: Hourly wage calculated from the Survey of Consumer Finances 1981 82 and 1984 97 and from the Labour Force Survey from 1997 2011. 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
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