The Economy

The Wealth Gap

Mary Janigan August 28 2000
The Economy

The Wealth Gap

Mary Janigan August 28 2000

In hindsight, it seems almost inevitable that 32-year-old Caroll Herron toppled, ever so slowly, to the bottom of the economic heap. A feisty high school graduate, the Montreal single mother lost her last secretarial job with a shipping firm in 1992 when the company went bankrupt. After 18 months of hunting for another office position, she finally settled for work as a cleaner with a company that restores fire-damaged premises. She quit last March when she developed serious asthma because of the chemicals. Now she and her daughter Christina, 10, subsist on Employment Insurance and other government payments—about $1,230 per month—while she pleads with potential employers and government bureaucrats for training. “I have bilingualism,” she says. “I have the secretarial skills. But I just don’t have the computer skills.”

Her downward spiral, struggling all the way, traces a path that many Canadians have followed throughout the 1990s: the poor are becoming relatively poorer, the wealthy are becoming wealthier—and many in that bulwark of society, the middle class, are watching their incomes and their dreams of upward mobility gradually erode. Since the early 1980s, middle-class families have pocketed an ever-smaller proportion of the nation’s incomes. Their children are often starting work at progressively lower salary levels. Worse, males in their prime earning years are finding that their chances of advancing are shrinking with every passing year. The workforce is bunching into both the lower and the higher ends of the income scale. Many workers who were once proud members of the middle class are now barely making ends meet.

Herron’s own experience tracks that arc of descent. When she worked for the shipping company, she earned a relatively comfortable $25,000 a year. At the cleaning company, her wages were $20,300. Now her government cheques add up to about $15,000 per year. Her expenses include rent of $300 per month for her duplex, $400 for food and $250 for heat and utilities. And her El ends in mid-December. “We eat a lot of hamburger and spaghetti,” she says. “You wake up in the morning hoping there is no bill in the mail.” Herron blames herself. “Now that I am older and wiser, I see that I should have gone further in school,” she says ruefully. “I am not envious of those who make more: they did things to make their life better. I just want a chance.”

New studies show Canada’s rich really are getting richer—and the poor poorer—as the middle class erodes

It is the disturbing secret of today's economy that chances for people like Herron are becoming harder and harder to find. Across many industrialized nations, such as the United States and Britain, the gulf between the wealthy and everyone else has been widening relentlessly throughout the past two decades. Experts had speculated that the trend was largely cyclical—and the gap would narrow in the late 1990s when the economy finally improved.

Their hopes have been dashed. After adjusting for inflation, the 1998 average income of Canadian families from earnings, investments and private pensions finally surpassed its previous peak in 1989: it hit $55,224, up from $54,508. But, amid the prosperity, there was a startling increase in inequality—as the wealthy increased their share of that income at the expense of almost everyone else. “There is a long-run, ongoing trend toward increasing inequality,” observes Queen’s University economist Charles Beach. “I am saddened. Sure, there is a bigger pie— but it is being distributed less equally.”

The problem is so worrisome that, behind the scenes, income inequality has become the big issue in government and academic circles. No one can agree on the cause—because there are many factors, ranging from technological change to declining union membership. No one can agree on the solution—because everyone is uneasily aware that many people like Herron need complex responses that include both money and targeted training. But, after the release in June of a Statistics Canada report on 1998 incomes, everyone can agree the problem is unsettling—and probably growing.

The agency’s report is stark. It divides the number of Canadian families and unattached individuals who receive income into five equal groups. Among the 8.3 million Canadian families, the top fifth was the only group to increase its share of income since 1989: its portion rose to 45.2 per cent—up from 41.9 per cent in 1989. The next group—which represents upper-middle income families—clung to almost the same 24.9 per cent share that it held in 1989. The middle and lower middle income groups saw their share fall slightly.

But the big shock was the bottom fifth: its share plummeted from 3.8 per cent to 3.1 per cent—a nearly 20 per cent plunge and a loss of billions of dollars of potential income share. Worse, government transfers—such as the child tax benefit and the old-age pension—and the tax system itself no longer do as much to reduce those inequalities: in 1994, the top 20 per cent took home $4.80 in after-tax, after-transfer income for every dollar that low-income Canadians received. That amount rose to $5.40 in 1998. (Before taxes and transfers, the top group’s income was about 14 times higher than the bottom group’s.) “Despite recent strong economic performance,” StatsCan noted dourly, “income disparities have continued to grow.”

The simmering issue may erupt in the upcoming federal election, expected next spring, because the very size and role of government will be the topic of heated debate. Although post-Second World War governments have played a major role in reducing disparities, that role is now under pressure. Taxes are biting the wealthy: although families in the top 20 per cent paid 48 per cent of income taxes in 1989, they paid 52.2 per cent in 1998. Meanwhile, the demand for redistribution is growing: government transfers in 1998 constituted a greater share of total income for every group except the top, compared with the proportion in 1989. The situation can be volatile: some anti-poverty groups have turned to militant action, but when a demonstration at Ontario’s Queen’s Park legislature turned violent in June, many commentators believed the activists had simply angered mainstream voters.

Winners and losers

In the decade from 1989 to 1998, there was a dramatic shift in how much income families brought home in earnings-including salaries, investments and private pensions, but excluding welfare, Canada Pension and other government payments. Families with two or more persons are broken into five equal segments, each representing 20 per cent of the total number of families. Average pretax incomes, in constant 1998 dollars:

Segment: POOREST

1989: $10,388

1998: $8,627

% change: -17%

Segment: LOWER-MIDDLE

1989: $31,427

1998: $27,486

% change: -13%

Segment: MIDDLE

1989: $31,427

1998: $27,486

% change: -13%

Segment: UPPER-MIDDLE

1989: $67,790

1998: $68,505

% change: +1%

Segment: RICHEST

1989: $114,178

1998: $124,681

% change: +9%


It becomes very worrisome if many people see their standards of living going down and don’t see how they can improve conditions’

What will happen if the hard-pressed middle class opts for a party such as the Canadian Alliance which promises lower taxes—at the possible expense of social programs? Will a wrenching debate ensue over the economic and social importance of sharing? “The data do show how important the role of government is in trying to offset inequality,” notes Ken Battle, president of the Ottawa-based Caledon Institute of Social Policy. “Things could come to a head because the push for tax cuts takes money out of the public realm.”

The situation may become more heated because the numbers conceal even more disturbing trends. Using income tax data from 1982 to 1996, economist Beach has observed that successive waves of young people have been entering the labor market at progressively lower average wage levels: that is, after adjusting for inflation, more and more young people are starting work at lower salaries.

As well, among males in their prime earning years of 35 to 54, there was expanding polarization: a greater portion of males—31.1 per cent in 1996 compared with 29.6 percent in 1982—has become very high earners. But the relatively high and middle income groups below have slipped, while a greater percentage of males have become low earners—14.5 per cent in 1996, up from 11.2 per cent. (The trend is not the same for women because more women are now working for longer hours.)

Many of the men in their prime earning years held blue-collar, unionized jobs that are simply disappearing as manufacturing plants become higher tech. Membership in the middle class is slowly declining. “We made real progress in the post-war decades in bringing about greater equality in the human condition,” says former Manitoba premier Ed Schreyer, who once suggested that Canada should ignore world trends—and insist that the take-home pay of the highest-paid employees of any firm should be only 2.5 times the average industrial wage to ensure greater equality. “These past 10 to 15 years have not been very reassuring.”

Perhaps worst of all, the chances of moving into a higher income bracket have been declining steadily, especially for men. In a yet-unpublished study which used Revenue Canada data, economist Beach and his colleague Ross Finnie tracked a large sample of taxpayers between 1982 and 1996, noting shifts into higher and lower income groups. The probability of moving up has declined by an average 1.2 per cent per year since 1982 for males—and by a mere .21 per cent for females. For men, in particular, the Canadian dream of “making it” is slowly abating.

The result can be devastating. In 1992, Catherine MacLeod, now 48, was an at-home mother of three, living in a spacious house in Calgary. Now divorced, she rents a subsidized condominium, working as a part-time waitress while studying for a university degree in justice studies. She hopes to find a job as a probation officer or a government researcher. “When I think about 10 years down the road, when my kids are raised, I’ll be in my fifties with no possibility of retirement and paying back a student loan,” she says. “What will I do then?”

Traditionally, social mobility has been a hallmark of Canadian and U.S. societies: in contrast to the more rigid class structure of traditional European workplaces, hard work could crumple economic barriers. Its erosion is troubling. “It becomes very worrisome if many people see their standards of living going down,” says University of British Columbia economics professor Thomas Lemieux, “and don’t see any way they can improve conditions.”

With diminishing hope, a precarious existence can become almost unbearable. Cindy Payne, 27, is a single mother with three youngsters who is now living in her parents’ house near Red Deer, Alta. Three months ago, Payne fled her abusive spouse, losing her only source of income as a foster mother. Now she lives on $1,000 per month in child support and federal payments while she hunts for permanent lodgings in which she can shelter more foster children. “It’s week-to-week for us,” she says. “It’s less than a few pay cheques between being stable and being very nervous.”

As more Canadians face Payne’s plight, there could be profound implications. What happens to Medicare and public education if the richest 20 percent opt for private health care and schooling? “Are we setting the stage for a kind of secession of the relatively affluent?” muses Andrew Jackson, research director at the Canadian Council on Social Development. “We would pay a big price if we went down that road. Look at the impact of poverty on health, on crime rates and on the economy in the sense that a large and growing part of society would not be making a productive contribution.”


Starting Low

53% of men entered the

job market in 1996

at low rates of pay,

compared with 37% in 1982

The Big Exception

23% of women aged 35 to 54

earned high rates of pay in 1996,

versus 14% in 1982

Source: Trends in short-Run Earnings Mobility in Canada, 1982-1996,

by Charles Beach and Ross Finnie, June, 2000 (unpublished)


The search for the causes of inequality has become intense. Globalization plays a role: wages for unskilled workers are not likely to rise when Third World nations can produce similar goods with cheaper labor costs. But, as economist Beach notes, that theory cannot account for all inequalities because income gaps are also growing in sectors not threatened by a flood of cheaper imports. Then there is the sheer pace of technological change: that obviously favors highly skilled employees. They, in turn, have displaced workers, mostly men, who once held blue-collar manufacturing jobs.

Even mundane paper-pushing jobs are evaporating. Joe Manget, vice-president at the Toronto-based Boston Consulting Group of Canada, recounts the experience of one of his clients, a global appliance manufacturer, which recently changed the way it grants employee discounts. In the past, employees had to go to a retailer, select their model, fill out the paperwork for discount approval, wait while the firm checked I their seniority and thus the size of f their discount, buy the product I from the retailer and then apply for I their refund. Now they go to the employees’ Web site store, enter their identification—and buy the product with a tap of their finger. “Technology is eliminating multiple layers of bureaucracy,” says Manget.

Still, that does not readily explain the fact that each emerging group of young workers is commanding lower average salaries. Shouldn’t younger workers as a whole be better attuned to a computerized world—and command higher wages? Not necessarily. Some academics believe that the increasing supply of educated workers is pushing down the salaries that they can command.

University of British Columbia economists Paul Beaudry and David Green counter that it is the growing demand for skilled workers that is creating the perplexing phenomenon: producers are switching to more advanced production methods because there are more skilled workers available—but the amount of investment capital in the economy has not been sufficient to fully fund those sectors. As a result, wages for skilled workers are rising, but by relatively limited amounts— because the supply of capital is constrained and the pool of skilled young workers is growing. Meanwhile, wages for unskilled young workers are dropping like stones—because increasing numbers of traditional plants are switching to production methods that require skilled labor. So average wages for each successive group of youth are declining.

‘There are no more “good” jobs. If we want to earn middle-class wages, we have to have middle-class skills.’

Finally, experts argue that inequalities are mounting because of a range of societal trends: deregulation, which sparks fierce competition among firms and downward pressure on wages; stagnant legal minimum wage levels; and decreasing unionization. Private sector union membership declined in just one year to 18.2 per cent of the labor force in 1998 from 21.9 per cent in 1997. Experts speculate that it could eventually approach the 1998 U.S. levels of 9.5 per cent of the entire workforce.

Such a precipitous drop would likely push down the wages -of less skilled workers. Queens University economist Richard Chaykowski and Northern Illinois University economist George Slotsve have calculated that Canadian non-unionized male workers are 2-1/2 times more likely to be below the Statistics Canada low-income line than union members; nonunion female workers are almost four times more likely to be poor. “Traditionally,” says Chaykowski, “unions have provided an important check to unfettered capitalism.” www.macleans.ca for links

The survivors count themselves lucky. At 43, Alex Smart has had several opportunities to advance beyond his job as a line tester with Nova Scotia’s telephone utility. He rejected them. With a grade 11 education, he figured that continued union membership offered his best hope for job security. “We have had big-time lay-offs,” he says. “If you’re a manager, they could just tap you on the shoulder. There’s a lot more security in the union: I should be able to stay through to retirement age.” Stuart is at the top of the union scale—$46,000 per year plus overtime. But he knows that he’s among the last of a secure breed. “I feel sorry for kids today who are never going to stay in a job and get a pension,” he says. “We’re the end of that.”

So what is to be done? Queen’s University economist Thomas Courchene argues that governments should start viewing health and educational programs as economic necessities for Canada’s most highly prized resource: people. Government transfers should encourage education from early childhood to post-secondary to lifelong learning. “There are no more good jobs—that is, jobs that pay you more than you are worth, he says flatly. “Now if we want to earn middle class wages, we have to have middle-class skills. And that means bringing up the education and skills level of the lower half of the population.”

That solution may not be easy—but it may be the only practical answer. In Vancouver, dot-com multimillionaires Jeff Berwick, 29, and Mark Crowther, 28, co-founders of Stock-House.Com, have already come to that conclusion. They have worked seven days a week, 15 hours a day, becoming online leaders in providing stock market information to media outlets. But they still find time to educate others. In his white ribbed T-shirt and beige cargo pants, his dyed-blond hair cropped short, Berwick volunteered as a lecturer last month to new media students at the Vancouver Film School. “Money doesn’t buy happiness,” he says. “It’s important to put back into the community.” The firm’s charities of choice include everything from the Children’s Wish Foundation to helping teenagers find jobs. “We want to show people how to succeed,” adds Crowther, “not to just give them handouts.” In an increasingly unequal society, such practical kindness may be the nation’s best hope.


Dividing the American pie

Canada's growing wealth gap mirrors that of the United States.

The portion of total household income received by each fifth of U.S. households:

Segment: POOREST

1980: 4.3%

1997: 3.6%


Segment: LOWER-MIDDLE

1980: 10.3%

1997: 8.9%


Segment: MIDDLE

1980: 16.9%

1997: 15%

Segment: UPPER-MIDDLE

1980: 24.8%

1997: 23.1%

Segment: UPPER-MIDDLE

1980: 43.7%

1997: 49.4%