May 1, 2012 – In the Financial Post today, MLI’s Jason Clemens discusses income inequality and mobility on International Workers’ Day. Clemens says, “Simplistically presenting the data to support pre-existing preferences for more taxes and redistribution would likely impede the very mobility that is so critical to overcoming low income.”
This column is based on Clemens recent paper published by the Macdonald-Laurier Institute, Income Inequality: Oversimplifying a Complicated Issue. Columns based on this paper also appeared in the Toronto Star and iPolitics. The full Financial Post column is copied below:
Income mobility blurs the picture painted by Occupiers
By Jason Clemens, Financial Post, May 1, 2012
The protests today from Occupy Wall Streeters to redistribute income from the rich to the poor are generally based on faulty, convenient and largely undisclosed assumptions about Canadians being stuck in inequality. That is, occupiers and others tend to offer policies that assume the people who face low income today are the same ones who encounter it tomorrow. Thankfully, the reality of Canadian society is that people move up (and down) the income ladder over time as their circumstances change.
The concept of mobility is fairly straightforward. It suggests that people’s earnings increase and decrease over the course of their lives in natural fluctuations. For example, all current workers were students at one point who likely earned at the low end of the range from a lack of skills and part-time work. However, their earnings increased as they completed their education and began working full time. Their earnings increased further as they gained experience and hopefully promotions.
There are also natural declines in income over one’s life. A spouse may take time away from the labour force to raise children. Workers may experience bouts of unemployment as they move from one firm to another. Workers also reduce their hours of work and their income as they transition to ¬retirement. Again, all of these ¬fluctuations are ¬naturally part of one’s life.
Statistics Canada monitors such fluctuations in order to better measure and understand the economic well-being of Canadians over time. Specifically, Statistics Canada’s Survey of Labour and Income Dynamics (SLID) follow 17,000 households over rotating six-year periods. Such data provides researchers and policymakers with powerful information about how Canadians’ income and labour market participation varies over time.
There are a number of ways to analyze mobility. A recent study by Statistics Canada divided the population into five equal groups (quintiles) based on income. Statistics Canada then followed these individuals over time to assess how their incomes changed relative to the initial income thresholds used to divide the population.
To get a sense of the income levels for these five groups, the average income (after tax) for individuals in 2005 was: $14,100, $25,400, $34,700, $46,100, and $76,600.
The latest one-year data, 2008-09, shows quite a bit of mobility, despite the marked economic slowdown of the period. For example, 25% of those who started in the bottom 20% had moved up at least one group within a year. Similar upward movement is observed for the second quintile (26%) and the third quintile (24%). Put differently, for each of the bottom three income groups (each composing 20% of the population), roughly one in four people moved up at least one group in just one year.
The rates of mobility increase when the period is extended to five years, covering 2005 to 2009. Forty-three percent of those who started in the bottom 20% moved up at least one grouping over five years. Rates of upward mobility were again strongest for the bottom 60% of earners over this period. These results are also remarkably similar to analyses completed in the 1990s.
In both the annual as well as the five-year data, Canadians also moved down income groups. However, the net effect over time was an increase in earnings – more people moved up than down. Contrary to the conception offered by the occupiers, it’s a not a zero-sum game where someone has to lose for someone else to win.
Mobility data can also examine the degree to which Canadians experience low income. Over the period 2002 to 2007, which is the latest available data, 80% of Canadians did not experience low income, defined as falling below Statistics Canada’s low-income cutoff. Roughly 8% experienced low income for one of the six years covered in the period. Only 2.1% of Canadians experienced low income for each of the six years.
Explaining the persistency of low income for this 2.1% is an important goal. We know it includes, to some degree, the attainment of education and family composition. Specifically, the data tell us that single parents and those who didn’t complete high school have a much higher chance of experiencing low income.
Canada is a mobile society characterized by both increases and decreases in income that are largely connected with natural changes in one’s life. Thankfully, the data have consistently shown an upward path for incomes and increasing opportunity for workers.
This is not to say that inequality should be discarded as an issue, but rather that it needs to be fully and completely understood. Simplistically presenting the data to support pre-existing preferences for more taxes and redistribution would likely impede the very mobility that is so critical to overcoming low income.
Jason Clemens is the director of research at the Ottawa-based Macdonald-Laurier Institute and the author of the recently released “Income Inequality: Oversimplifying a Complicated Issue,” available at www.macdonaldlaurier.ca.