Distribution of Income in Canada

MR. POTTS:

Mesdames, messieurs, c'est avec plaisir que j'ai le grand privilege de souhaiter la bienvenue, de votre part, au Dr. Andre Raynauld, le President Conseil Economique du Canada.

It has been said that if you want economy never let an economic question get into politics. Even if, for the purpose of discussion, one assumes that this proposition is valid, which is a rather large assumption, there can be little doubt but that, as a social objective, it is quite unrealistic and impossible of fulfillment. Economic questions, particularly today, are inextricably entwined with politics.

It does not follow, however, that economists as such cannot maintain a respectable and healthy degree of independence from politicians.

Sir, during our current season, we have had a fairly healthy diet of politicians, including the leaders of all four national parties, two provincial Premiers and three candidates for the position of Mayor of the City of Toronto.

Today, we are delighted to welcome you--our first economist of the season-pure, unsullied and independent--in the political sense.

Economics is by no means a new profession yet I think it fair to say that it is only relatively recently that Economists have come to be recognized and accepted by the general public.

This would appear to be true insofar as The Empire Club of Canada is concerned. The word "Economics" does not even appear in the subject index published in 1953, which included all addresses to the Club during its first fifty years of existence.

Needless to say there were many speakers, during the course of those fifty years who discussed economic questions, including Stephen Leacock.

However, the heading "Economics" first appeared in the subject index published in 1963. Included were references to addresses by Dr. Arthur Smith entitled "Some Questions about Economic Planning in Canada"; and by Dr. Walter Heller, entitled "Our Economic Prospects and Policies".

The Club has redeemed itself to a considerable extent in recent years having been addressed by many distinguished Economists, including Ludwig Erhard, Harry Johnson, Paul McCracken, John Young and one of our guests at the head table today, Bob MacIntosh, who is also renowned as the Chairman of the Board of Governors of York University.

We are all subject to economic pressures these days--the cost of living, employment, taxes, etc., but sometimes we allow these pressures to be carried to extremes.

For example, I recently heard of a man who was engaged in negotiating a very important contract. On the day when he expected to successfully conclude the negotiations he learned that the other party, Williams by name, had suffered a heart attack and was in hospital in the intensive care unit. You can imagine his frustration!

When he advised his partner who was to meet with Williams that day, that he would not be able to do so his rather overzealous partner replied "Certainly I can. I'm going to the hospital to pull off his oxygen mask and pinch his intravenous tube and then he will know that the pressure is on!"

Judging by the accomplishments of our distinguished guest, he must have been subjected to a few pressures, economic and otherwise, in his day, but undoubtedly he never reacted in such a frenetic fashion. Our guest has a distinguished academic record having received his Master's Degree from l'Universite de Montreal in 1951 and his Doctorat de I'Universite de Paris in 1954. He was a Professor of Economics at l'Universite de Montreal and a Visiting Professor at the University of Toronto; President of the Canadian Institute of Public Affairs; Economic Adviser to The Royal Commission on Bilingualism and Biculturalism; Member of the Board of Directors and Executive Council of the Canadian Broadcasting Corporation; Economic Adviser to the Deputy Minister of Finance of Canada and President de la Societe Canadienne de Science Economique.

In his spare time he has written many learned books and articles. A member of the Royal Society of Canada, he was appointed Chairman of the Economic Council of Canada on January 1, 1972, having formerly been a member of the Council.

Dr. Raynauld is the third Chairman of the Council, which was established in 1963 ten years ago, to take a look into the medium--and longer--term future with a view to clarifying some of the goals and objectives which we, as Canadians, ought to set for ourselves, as well as to assess how the economy was progressing towards goals of these kinds and to consider what kind of decisions and policies would facilitate the maintenance of sustained progress towards our basic economic and social goals.

Dr. Raynauld, we are indeed indebted to you for having taken out time from your busy schedule to speak to us today.

Mesdames, messieurs--c'est vraiement un honneur de vous presenter-Dr. Andre Raynauld, le President, Conseil Economique du Canada.

DR. ANDRE RAYNAULD:

Merci beaucoup, monsieur le President, chers collegues du Conseil Economique du Canada, Ladies and Gentlemen:

Today I propose to reach beyond everyday preoccupations, and talk to you about a subject as old as the hills, social equality. Social equality is alway topical! It is an ideal that has been aspired to by people in all walks of life, and for centuries it has been supported and promoted by reformist movements of the intellectual elite.

However, equality does not mean the same thing at different times. It is constantly taking on new forms, as societies evolve economically, socially, and technologically. It is axiomatic that such an issue be re-examined periodically, in the light of current developments. I intend to do just that during the following few minutes.

When I speak of "social equality" here and now, I am speaking of income equality. History shows that the distribution of incomes is closely associated with the degree of development of an economy. In developing countries, inequality is far more prominent than in the developed ones. The reason is that industrial revolution means change, and change generates insecurity and risk. As a necessary compensation, the range of incomes widens. The close relationship with stage of development seems to hold true for all economic systems. In countries that have reached a similar stage of development, labour incomes are in fact distributed in approximately the same way.

As will be readily appreciated, international comparisons can only be made in the broadest of terms. Although we must be aware of the dangers involved in making such comparisons, nevertheless, some useful analysis can be undertaken.

A common way of examining the pattern of income distribution is to arrange the population into classes from lowest to highest incomes, and look at the share of total personal income accruing to each class. In Canada, the most recent study shows that the 20 per cent of family units at the lowest end of the income scale receive 4.3 per cent of total income. And half of the 4.3 per cent is in the form of government transfers. At the other end of the scale, the richest 20 per cent of family units receive 45 per cent of total income. In the United States, incomes appear to be somewhat more equally distributed than in Canada. Corresponding figures for that country are 5 per cent of income for the lowest class of family unit, and 41 per cent for the highest class compared with the 45 per cent that I have just mentioned.

In an article published by Fortune magazine in December 1972, income distributions are compared internationally by using Gini coefficients. These are numbers ranging between zero and one, which indicate the degree of equality of distribution. On this scale, zero represents complete equality, and one represents complete inequality (that is, all the income flowing to one person or one family). For most industrialized countries, the coefficient is between .35 and .50. It is below .40 in Canada, the United States, the United Kingdom and Australia, between .40 and .50 in West Germany and The Netherlands, and a bit over .50, or the halfway mark, in France and Sweden.

Another recent comparison on income distribution between Poland, the United Kingdom, the United States, and the U.S.S.R. has interesting results. Most wage and salary earners--well over 90 percent--are in the same relative position on the income scales of all four countries. For the remaining 10 percent, at the high and low extremes, significant differences were observed, as could be expected.

Income distributions being associated with the degree of economic development tend to change rather slowly over time. History does show, however, that in the long run, major changes have taken place in the distribution of income. In France, for example, between 1875 and 1955, salaries of public servants relative to those of labourers were reduced from a ratio of 15:1 to 5:1. In the United Kingdom, the ratios fell from 32:1 to 16:1 in the same period. By contrast, and this may come as a surprise to most people, over the past 25 years very little if any progress has been made towards greater equality within most industrialized countries. The evidence for Canada is scanty. But the distribution I just quoted for 1969 can be compared fairly directly with that derived from another study based on 1961 data. Between 1961 and 1969 the share of income accounted for by the lowest 40 per cent of families remained basically unchanged while the share attributable to the top 20 per cent of families may actually have increased. Another study, which examined the decade 1951-61, also found no overall changes in the distribution of income. Taking the two together then, there is evidence that income inequality in Canada has not been reduced since 1951. The same trend--or nontrend--is evident in the United States. Between 1935 and 1947, some progress towards greater equality was made, but since that time, no further improvement has been apparent.

Having outlined--very broadly--the problem of inequality in Canada, I would like to discuss the solutions that have been tried out. The traditional approach is fiscal. Valiant attempts have been made to even out income distribution by means of taxes and government expenditures. We must now admit, however, that such fiscal adjustments have negligible results; sometimes, they even increase inequality.

The figures I quoted earlier for income distribution for Canada were calculated before taxes, and they excluded government expenditure programs, except for direct transfer payments. When we look at taxes, we find that, in 1969, the Canadian tax system was extremely regressive at the lower end of the income scale. That is, the overall effective tax rates were higher for the poor than- for the rich. Taxes were regressive up to an income level of about $4,000, that is, for anywhere between 17 and 28 per cent of families, depending on the province. Above the $4,000 level, the tax system became basically proportional, at an effective tax rate of about 38 percent.

The only tax in the entire system that is progressive over all incomes is the personal income tax. Corporate taxes (assuming one-quarter shifting to consumers) are regressive at the low end, proportional over the middle range, and then quite progressive at the upper end. Consumption taxes--like general sales taxes--are regressive throughout, and social security contributions--like the Canada and Quebec Pension Plans--are basically proportional taxes, except for the lowest income groups where they are regressive. Most regressive of all is the property tax.

By level of government, federal taxes are the least regressive over the lower-income ranges and because of the influence of personal income taxes, are the only ones to show evidence of progressivity over the higher ranges. Provincial taxes are basically proportional after the initial regressive range. Finally, because of the dominance of property taxes, the municipal tax system is regressive over all incomes. Thus we find that the tax system becomes more regressive as we move from federal to provincial to local tax levels. This corresponds to the often noted difficulty of the lower level governments to levy taxes that are related directly to income.

This pattern of tax incidence does not seem to have changed over the past decade, as Professor Gillespie found the same pattern in his study of 1961 taxes. American studies of tax incidence also conclude that taxes are regressive for those at the low end of the scale and then basically proportional. In the United Kingdom the system appears to be proportional over the entire range.

Government expenditures, on the other hand, appear to be highly redistributive in favour of the lower-income groups, and in fact they outweigh the regressive incidence pattern of taxes. As a result, the net effect of government policy-according to the last complete study in 1961 for Canada-was to redistribute income in favour of the lowerincome classes, with the breakeven point occurring between $9,000 and $10,000. It was also found that social welfare payments were the most redistributive class of expenditures and that programs at the federal level were the most redistributive over all. By way of illustration, let me recall my earlier comment that one-half of the total income of the lowest group was accounted for by government transfers.

While we have no studies available later than 1961 on the incidence of expenditures, it is quite probable that they have become even more redistributive since that time. The expansion of social welfare services, the inauguration of Medicare, and the relative decline of defence expenditures (which are much less redistributive, if at all) all point in this direction.

To summarize, it appears that it is not our tax system that works to redistribute income in favour of the poor, as was once commonly thought. Rather, that function is served by government expenditure policies, especially the social welfare system.

This being said, and due credit rendered to public authorities, the fact remains that fiscal measures are clearly inadequate. They have almost reached their limit, considering the effects of assistance programs on incentives to work and, indeed, while income distribution is influenced by the degree of development of an economy, it is equally conceivable that the pace of development will in turn be influenced by income distribution. With more equality, there is in fact less incentive to change. This assumption, plus the fact that the distribution of wealth is definitely more acceptable now than in the past, means that discussions on distribution are becoming far less dogmatic. Certainly issues are becoming more concrete. Today, concern is focused on particular groups of citizens, rather than on broad income classes. The concept of equality has found expression on two battlefronts: the war against poverty and the fight against discrimination. The rationales for both are based on unpleasant realities. According to the Economic Council definitions of poverty, 22 percent of all family units--one and a half million in 1971--in Canada are poverty-stricken. Similarly, we are righteously concerned about the future of certain groups of the population. The labour income of women in 1961 was lower by more than half on average than that of men. Finally, in Canada, in 1961 there were also important and unexplained differences in labour income between Canadians of French origin and those of other origins. Furthermore, assistance programs can never be more than a surrogate, because the real problem raised by poverty or discrimination is the exclusion from the productive sector of some groups who are able to work and anxious to do so. These are, in my opinion, the main aspects of the problem of equality in our country at this stage of history.

For several years now, specific techniques have been used to deal with social inequality. They stem from a philosophy' diametrically opposed to assistance. This philosophy is defined essentially by the principle of equal opportunity. According to this venerable school of thought, which dates back at least to the 18th century, men are equal at birth and, if society is well organized, the success and development of individuals is directly proportional to their personal qualities.

A well-organized society in this context implies that barriers to upward mobility have been abolished. Until recently, education was held to be the main barrier, and thus the main source of social inequality. Over the last 20 years, efforts to solve this problem have been spectacular. Free, universal, and compulsory education has been instituted. School and university programs are available to the population at large. Continuous retraining programs conceived for the labour force have been put into effect. And, huge sums of money were spent for these purposes.

An attack has also been launched against the most obvious forms of discrimination, particularly in the United States, so as to ensure that chances of success in life are the same for all.

This principle of equal opportunity is now being challenged. It is challenged for four basic reasons. The first is related to results: despite adjustments made by reforms in education and by the fight against discrimination, no noticeable progress towards a better distribution of wealth has been realized since the Second World War as I said before. Another reason is the questioning of the assumption that all men are equal at birth. Nowadays, a steadily growing number of psychologists and biologists are stressing the importance of hereditary factors in determining a person's potential for success. It would appear difficult to continue ignoring the evidence accumulated to this effect and although I do not wish to prejudge the resolution of this debate, it seems that it will undoubtedly be necessary to consider modifying general policies adopted up to now, in favour of ones geared to the needs of specific groups.

The third reason is partly a corollary of the preceding one: education is not as efficient a tool as we had believed in reducing social inequalities. Scholastic achievements are attributable as much to family influence or background as to that of the school, or so it seems; incomes are related more to occupation than to education; and skills acquired through formal education are subject to faster and faster rates of obsolescence.

Finally, discrimination has been interpreted too narrowly for the fight against it to achieve effective equality of opportunity.

All in all, however, this questioning of basic principles should not lead to abandonment of the fight. The challenge should rather incite us to redefine equality of opportunities in a broader context, closer to the real workings of markets and institutions. To this subject I will devote the last part of my speech.

Any reformulation of the principle of equal opportunities is not just a matter of semantics. Rather, its objective is to serve as a base for more adequate policies. While the preceding considerations have been based mainly on U.S. experience, the following examples are drawn from the Canadian situation which is clearly different in many respects. Up to now equality has been defined as if people were abstractions, and as if their rights and obligations as individuals were limited to legal prescriptions. What I propose, in contrast, is a system that would relate to real people, whose opportunities depend to a great extent on the groups to which they belong. Thus equality should be approached by first defining the opportunities of these groups; however, they are defined as, for example, by social class, language and culture, type of activity, or region.

Opportunities are also subject to various institutions, like the labour market, which operate under their own laws. I will give you an example. Take an industrial structure where salaries paid for all jobs are lower in one area than in another. In such a case, an equal opportunity scheme focusing exclusively on individual training and personal effort would not have much effect because incomes are dictated in any case by the market for labour. In view of these considerations, I think it is appropriate to use another word than " discrimination" when referring to the various barriers to social promotion. Usually, discrimination is interpreted as meaning a disparity in wages and salaries paid for similar jobs or workers. On the basis of such a definition, I would say that discrimination is not widespread in Canada. But, on the other hand, the phenomenon I would call segregation, in its proper meaning of isolation or immobility, is very pervasive. Labour income of women, I said before, is half that of men in Canada. The major part of this discrepancy is not attributable to discrimination, but to the fact that women generally have low-wage jobs. Income disparities between French-speaking and English-speaking Canadians are also mainly due to the different patterns of activity of the two groups and to their respective levels of education. An efficient approach to equality therefore must take into consideration the functioning of existing institutions and communities.

This brings me naturally to a discussion of how this segregation is maintained-the access to jobs.

Earlier I said that the income distribution has remained basically unchanged in Canada for 20 or 25 years, while during the same period a major surge has occurred in formal education. These results are contrary to expectations. One would expect that if the supply of skilled workers increased, the relative incomes of the higher classes would fall. Similarly, moving people up from the lower ranks, through education, would raise the low incomes so that, over all, market earnings become more equal. This is not what happens. A formal and elaborate explanation was given recently for this apparent inconsistency. Put simply, the explanation is that wages and salaries are fixed for given tasks, and the best workers get the jobs. Workers thus compete for jobs, not wages. From the viewpoint of the employer, the best workers are those who can be trained on the job at the minimum cost. If, for example, the supply of university graduates increases, they simply displace non university graduates with no impact on the distribution of incomes. The key to the distribution of income thus is the distribution of job opportunities. What are the jobs available over the whole spectrum? This is a demand factor quite independent of anything a person can do himself to improve his lot. Job opportunities depend in turn upon the level of aggregate demand and the economic structure or, more concretely, the composition of industries and occupations. Let me illustrate this with a specific Canadian case.

Income disparities between francophones and anglophones in Canada can be attributed, in my view, to unequal access to jobs. In an establishment where English is the language of work, a person with French as mother tongue has an obvious temporary handicap. The same problem arises when an anglophone offers his services to a French school board. The less knowledge the employer has about the educational, family, and social background of the prospective employee, the more he is risking. The information network, formal and informal, is more efficient within any group than between groups. Similarly, the search for applicants or for jobs is more costly when the employer or the applicant moves outside his respective group. More important still, the costs increase as one moves from simple manual tasks to highly sophisticated ones. Therefore, the disparities in income both in absolute and relative terms should increase between francophones and anglophones as one moves from lowpaying to high-paying jobs. Indeed, this is exactly what the evidence shows. There is more segregation at the top than at the bottom of the occupational structure, more segregation for the educated people than for the uneducated. The consequence is clear: the objective of equal opportunity for all will never be achieved by education alone. Quite the contrary.

In this re-examination of the principle of equal opportunity, we have found that policies limited to the removal of personal handicaps such as the lack of education or training, or ignorance of a language are not sufficient to ensure genuine equality of opportunity.

Additional measures are necessary, measures that affect the demand for labour-for example, removing artificial restrictions based on formal educational requirements or based on any other basis. More particularly, programs are needed that focus specifically on the groups that we want to bring back fully into the productive stream. Equality of income opportunity is a noble ideal; but it deserves and requires strenuous and well-directed efforts if it is to be achieved.

Thank you.

Dr. Raynauld was thanked on behalf of The Empire Club by Lieutenant Colonel P. W. Hunter, a Director of the Club.

LIEUTENANT COLONEL HUNTER:

Dr. Raynauld, paraphrasing the incomparable line in George Orwell's marvelous Animal Farm, it can be said that "all men are created equal" but some are more equal than others. Your comments today emphatically remind us how true this is and the observations and information you have expressed are, indeed, food for thought for all of us.

I am told that your subject Distribution of Income in Canada is one of very special interest to you and a problem to which you and the Economic Council of Canada are directing particular effort and focusing attention in order to see corrective action taken.

You are to be commended and all of us join in wishing you well in your endeavours.

In the past, Dr. Raynauld, we have been privileged to listen to former chairmen of the Economic Council of Canada. In each instance we have been presented with a learned and enlightening report on our nation's economy or a specific facet of it. You have today, sir, maintained the tradition of excellence established by your predecessors and we are grateful for the time and energy you have devoted to speak to The Empire Club of Canada. And if I may be allowed a moment or two more, sir, I would like to compliment you and your colleagues in the Economic Council for the fine work you are doing. The resource for business, industry and government that your organization represents is a valuable one and I sincerely hope it is utilized to its full extent by those who carry the responsibility for shaping the economic destiny of our country, its various regions and population groups.

Not long ago Dr. James Gillies, the new M.P. for Don Mills, said "Too little attention is being paid to our country's crystal ball gazers." He meant the advice you as a member of this particular elite are able to give to both government and business is essential for sound policy making.

All of us who have listened to you this afternoon need no further convincing. I just hope there are many other ears tuned to the counsel you are able to give.

Again, Dr. Raynauld, our sincere thanks for being a guest of The Empire Club.