Income inequality is an important indicator of equity, which is one of the essential factors that helps to create long-term stability and efficiency, Income inequality is closely related to the living standard and life satisfaction of a country’s citizens. Therefore, when income inequality appears, it could lead to various social and economic problems. According to the Social Planning Council of Winnipeg (2013), researchers have summarized three measurable impacts of income inequality.
First, due to the reduction of jobs and wages in certain industries, workers may have lower productivity when they are excluded from employment and the economy. Thus, this would in turn slow down the growth of the economy. Second, direct financial sots will be induced due to the needs to provide more social services, including social housing and supporting programs, in order to help people living in poverty. Finally, indirect financial costs aiming at maintaining security will increase, as the costs for supporting the criminal justice system and health care system will be increased by a large margin.
Over the past three decades, income inequality has become an increasingly severe issue in many developed countries including Canada. CB News reported that in 2010, the share of income owned by the top one percent in Canada has increased from % in 1982 to 13. 3%. Even after taxes, it still went from 6. 3-9. 9 percent (Archon, 2014). In 2011, The Globe and Mail reported that income inequality in Canada was higher than the average Of 34 COED countries, although it was slightly better than the situation in the United States.
In 2008, the average income of the top 10 per cent Canadians was $103,500, which was 10 times higher than that of the bottom 10 per cent. However, this ratio was only 8 to 1 in the early sass (Grant, 2012). In 2012, the richest one percent Canadian earned 10. 6 percent of Canada’s income, which increased dramatically from . 1 per cent in 1982 (The Globe and Mail, 2013). In addition to the widening absolute wage gap between individuals, income inequality between Canadian families has also increased since sass, and it peaked in the 20005 (Restate, 2013).
During the past few decades, the percentage of middle-income families was shrinking while the share of Iow- and high-income families has been growing. A study conducted by ROB demonstrated that up until 2009, the wealthiest households in Canada made up 3. 7 percent of all households but controlled 67 percent of the total household wealth in the country (Royal Bank of Canada, 2009). While scholars have reached a consensus that income inequality has become an increasingly severe issue in most developed countries, there has been heated debate regarding the main causes and possible solutions for this worldwide phenomenon.
In terms of Canada, the widening wage gap could be attributed to multiple factors, including (but not limited to) the female participation rate in labor force, the increase in demand for workers with postsecondary education, the decline of unionization, and the increase in international trade. This paper will classify and analyze all hose factors into 3 major categories: the supply of labor, the demand of labor, and the institutional factors. Finally, we will conclude this paper by offering possible solutions to reverse, slow, or mitigate the factors that have led to labor market popularization in Canada. . Supply of Labor 1. 1 : The Increasing Demand for Postsecondary Education Among the many trends which have impacted the overall earnings inequality, one thing worth noting is the increase in earning differentials between more and less educated workers (Kuhn: 1995). Canada, US, and various other countries have demonstrated that greater educational attainments amongst the population can have substantial effects on the degree of inequality, by increasing the relative wage differences between more and less educated labor.
The trends towards educational attainment have varied for the past couple decades. Freeman (1976) argues that in the early-mid sass, the returns to a university education were declining, which resulted in fewer people achieving a university education throughout the sass. In Kuhn, Eden & Holland (1995) explain the fluctuation in university attendance using the economic cobweb model. This model suggests that rises in certain types of markets are subject to periodic fluctuations.
In otherworld, an increased supply of university graduates decreased the wage premiums throughout the sass, and as a result fewer people attended university. Kuhn (1995) noted a premium rebound in the 1 sass, with a trend Of university education again increasing among highly educated workers. Therefore, increasing educational attainment has caused a narrowing of the wage differentials in Canada in the 1 9705, but is noted in the literature as a potential cause in the rate which earnings inequality has increased in Canada nice the sass.
Thus, an increase in the education rates among Canadians has resulted in a corresponding increase in wage inequality. However, while the demand for post-secondary education has increased dramatically, the demand for other skills has hardly changed at all (Limited, 2006). Limited (2006) uses a human capital model, along with descriptive evidence from quintile regressions to demonstrate that the wage inequality between 1973-2005 was due to the corresponding increase in the return to post- secondary education.
Similar to other researchers, Limited has found that he increase in the returns to education was concentrated throughout the sass. He argues (2006:1) “In a simple human capital model, wage inequality can increase because returns to education and experience increase, or because residual or within-group inequality increases. ” Using quintile regressions, Limited has demonstrated that the returns to post-secondary education increased sharply; however, the returns to lower levels of education have remained unchanged.
In otherworld, wage inequality is increasingly concentrated at the upper end Of the Wage distribution. The exult of these findings is that the wage gap between higher educated individuals (such as college post-graduates and college graduates) has increased more than the wage gap of lower educated individuals (such as high school graduates and high school dropouts). Overall, increasing demand for postsecondary education plays a critical role in the changes in wage inequality in Canada.
Further, using quintile regressions analysis, Limited (2006) demonstrates that the return to education has increased more dramatically in upper quintiles, and by a smaller amount in the lower quintile range. Although post-secondary education plays a critical role in understanding wage inequality in Canada, it is questionable why education plays such a leading role in this wage disparity, when compared to other labor supply qualities such as experience, or other generic skill categories.
Although an abundance of literature has been devoted to explaining the effects of education on the wage gap, there is a growing need to understand why the demand for post-secondary education has increased dramatically over time, while the demand for other skills continues to remain unchanged. 1 2: Canada’s Immigration policy The second contributing factor that can explain the wage inequality in Canada is the increase in immigrant labor to Canada. Immigrants continue to make up a large portion of the labor market.
Immigration per capita in Canada is the highest in the world, and has been in excess of 200,000 people per year since 1990 (Reid: February 2015). According to the crowding model of immigration, it is possible that large inflows of immigrant labor can result in an increase in the wage inequality. This is because unskilled immigrants, or immigrants with unrecognized credentials “crowd” the lower end of the Barbour market, thus bidding the wages down and having a corresponding increase on wage inequality (Kuhn: 1995).
Early studies on immigrant inflows to Canada found small effects of increasingly immigrant labor to Canada. Theoretically speaking and according to the crowding model, increasing immigrant labor is ambiguous in terms of the impact it has on the wage gap. This is because although an increase in immigrant labor can bid wages down, immigrants also spend more money in the economy, which would have an offsetting effect on the wage gap. Initially, empirical studies in the early sass showed very little influence of immigrant labor.
Card (1990) found no effect on the US Miami labor market following changes to the US immigration policies. Therefore, the changes in the legislative policies were not endogenous to the labor market. Father, Card & Alton (1991) found no link between changes in immigration and labor market outcomes. On the other hand, more recent studies have found considerably bigger effects Of immigrant labor. A study by Kidneys & Kidneys (2002) analyzed the earnings of domestic born Canadians compared to visible minority immigrants living in Canada.
They found an earnings disadvantage of visible minorities largely confined to immigrant men, mostly Black males. The earnings of immigrants can be explained by two different concepts: the entry effect and economic assimilation (Reid, February 2015). The former concept refers to the fact that immigrants initially earn less than similarly qualified Canadians; however, as they accumulate years in Canada their earnings start to increase and rise faster than Canadians. Although earnings generally increase with age, this is especially pronounced for immigrants.
The concept of economic assimilation refers to the phenomenon that earnings of immigrants rise faster than Canadians. This is due to the selectivity bias that people who immigrate are a highly motivated group, and as a result they end up doing better. Reid (February 201 5) argues that recent cohorts of immigrants are doing poorly than previous cohorts, which can explain the discrepancies be;en previous research and more recent studies since the 20005. This may be contributed to the larger entry effect, resulting in lower earnings that cannot be overcome despite a faster-growing economic assimilation.
Baker & Benjamin (1994) argue that there is a huge disconnect teen Canada’s point system and corresponding labor market outcomes in Canada. They paint a pessimistic picture of the immigrant labor market, arguing that many skilled professionals who immigrate to Canada struggle in the labor market since their credentials and work experience are not recognized. In otherworld, there is a disconnect between the federal government who operates the immigration policy, and the provincial government who actually does the hiring.
This is an issue since immigrants are encouraged to come to Canada, but then face inequality compared to those native-born Canadians with equivalent credentials. Finally, a study by Picot & Ho (2014) revealed that immigration policies and selection programs in Canada heavily influence wage inequality. For example, the increase in entry earnings and fall of low-income rates can be attributed to the Immigration and Refugee Protection Act in 2002 and the expansion of the Provincial Nominee Program (PAN), along with changes in immigrant characteristics (educational attainment and source regions).
Overall, Picot & Ho (2014) argue that whether positive or negative, immigration is likely to have a small effect on the overall wage gap in Canada. Nonetheless, immigration policies and selection procedures should work to play down the negative effects immigration may have on increasing the wage inequality in Canada. 1. 3 ELF Participation Rates Among Women The third contributing factor that has been widening the wage inequality would be the increase in female labor force participation rate.
Over the past 40 years, women have increased their participation in the labor market from 58 percent in the early sass to 74 percent in 2011 (Portion, Green, Limited, and Mulligan, 2012). The increase in women’s participation rate in the labor Orca could have a potential negative affect income inequality and the wage gap for two main reasons. On one hand, females who enter the workforce with postsecondary education could actually strengthen employer’s bias towards employees with higher education, and this will further lower the relative demand for workers without postsecondary education.
On the other hand, as the demand for workers without postsecondary education is even lower than before, females entering labor intensive industries would be more likely to receive minimum wage and thus enlarge the population who are in the low-income end. First, in comparison to males, the proportion of 20 to 24-year-old females attending university has been increasing with a faster pace, which has increased from 17. 5 percent in 1997 to 23 percent in 201 0 (Portion, Green, Limited, and Mulligan, 2012).
As mentioned in the previous section, the growing demand for workers with postsecondary education is one of the biggest factors that have led to the widening wage inequality in Canada. Therefore, proportionally, with the higher percentage of females entering labor force with postsecondary education, workers without university degrees are more likely to receive lower wages, resulting in a larger absolute wage gap and the shrink of middle-income populations. Also, different from male workers, females with postsecondary education are more likely to work in public sectors, which have not been heavily affected by the decline in unionization.
Moreover, they are less likely to work in manufacturing jobs, which have been negatively affected by the decline in manufacturing jobs. Thus, on one hand, the growing number of females entering workforce could indeed add pressure to the wage for workers without university education and thus widen the wage gap between these two groups (Portion, Green, Limited, and Mulligan, 2012). On the other hand, for females who do not possess university degrees, their situation has become worse due to the traditional wage inequality across gender.
This situation could increase the share of the population who are receiving the bottom 10% wages. Although the average male-female wage gap has been narrowed in recent years, for females who do not have postsecondary education, their wage is still proven to be lower than their male counterparts. CB News reported that for females working in historically low-paying jobs, such as childcare and clerical work, their 201 2 wages were around 62% to 5% of the compensation of their male counterparts (CB News, 2013).
Thus, females without high-level education could actually enlarge the proportion of the population who are on the low-paying range, which leads to a more serious wage inequality problem in Canada. II. Demand of Labor 2. 1 Increased International Trade and Outsourcing With the rapid integration of the global economy, international trade and outsourcing have become increasingly prevalent, and many multinational corporations have outsourced their production lines to third world countries where the cost of labor is cheaper. According to the data reported by
Statistics Canada, from 1981 to 2001, the shares of imports from lower-wage countries have increased from 3. 4 to 7. 4 percent. While international trade and outsourcing could increase the profitability of businesses in developed countries, the fiercer competition in labor market have actually led to increasing wage inequality in Canada, which could in turn hurt the economy and the stability of society. As a large amount of labor-intensive products are imported from developing countries, the demand for jobs in labor intensive sectors, such as manufacturing, could be largely reduced in developed countries (Bureau and Rugby, 2009).
As the demand for those jobs decreases, the wages paid to workers in those industries would be negatively affected. According to a study conducted by scholars from Oxford University, the increase in competition from low-income countries could decrease the wages of workers in developed countries, especially for workers without postsecondary education. In Bureau and Rigors study (2009) regarding wage inequality in Canada and international trade, it was shown that for every 100% increase in imports from low-income countries, it would result in a 1. 1% decrease in the wages of workers who have not completed high school education.
Findings suggest that the wages of workers in labor intensive and product differentiated industries decline as imports increase. This is consistent with the factor composition of many of the goods imported into Canada from low-income countries. For instance, in 2001 , the top 25 industries of Canadian imports from China included clothing, footwear, knitted fabrics and leather products of various kinds, all of which are labor- intensive industries. Interestingly, for workers who possess higher level Of education, the negative influences of import competition on wages disappear.
More importantly, for entrepreneurs who own those multinational companies, they actually become wealthier from outsourcing and international trade. Their businesses become more profitable, as now they are facing a larger product market and cheaper labor market. As a result, with increasing popularity of international trade and outsourcing, income inequality tends to be higher in developed countries, as import competition would only lower the wage level or employment opportunities for less- educated workers in skills-intensive sectors, whereas it will not affect or even benefit the most educated people in the county. 2: Increased Use of Technology Many studies have argued that skill-based technology change is the principal culprit of increased demand for skilled labor. This is vastly different from earlier decades when assembly-line technology was pervasive. Under these circumstances, the demand for labor was biased in favor of low-skilled and semiskilled labor (Barman, Bound, & Machine, 1997). Barman, Bound, & Cherishes (1994) found that manufacturing industries which had the greatest increases in skilled labor demand was positively correlated with industries which made the biggest investments in new technologies.
Kuhn (1995) argues that similar results are also confirmed by a variety of studies undertaken by the U. S. Bureau of Labor Statistics. Therefore, technology has contributed to the wage gap since the development of new technologies have increased the demand for ‘brainy’ and well-educated workers, and further lowered the demand for unskilled workers in developed countries. Kuhn (1995) argues that technology can also indirectly influence wage inequality in Canada through the increased international mobility of capital, mainly in the use of foreign direct investment.
As mentioned previously, impasses are now operating at an increasingly international level. Relocation of production facilities into low-wage developing countries are now possible, with the goal of decreasing production costs and increase firm profits. However, the relocation of production facilities is facilitated by recent advances in technology, which is in turn responsible for the increased demand for skilled labor, and a corresponding decrease in the demand for unskilled labor.
In otherworld, technological advances facilitate outsourcing, which is in turn responsible for the declining wages of unskilled workers in Canada and the increased demand for skilled labor. Overall, the literature relating to technology advances shares a common belief in the power of technology to reshape work organization and social inequality in Canada. Although many factors are important in shaping wage outcomes, studies have demonstrated that computer use is relevant to the distribution of earnings and skills. Ill. Institutional Factors 3. : Minimum Wage Studies have shown that after calculating the inflation rates, the minimum wage in Canada had barely increased over the past 40 years, and this has contributed to the widening wage inequality in the country. According to Statistics Canada, in 2013, the average minimum wage was $10. 14 per hour. When the minimum wage in 1975 was translated into 2013 dollars, it was almost identical at $10. 13 (Statistics Canada, 2014). Based on the data collected by Labor Force Survey, the proportion of all paid employees earning the minimum wage was increased from 5. % in 1997 to 6. 7% in 201 3, and the proportion of young employees aged 15 to 19 who were paid the minimum wage rose from 30% in 2003 to 45% in 2010. At the same time, the share of workers who were paid between the minimum wage and 10% above he minimum wage declined from 31% to 21% (Statistics Canada, 2014). Minimum wages compress the wage structure at the bottom of the distribution, and countries that impose high minimum wages (relative to the average wage) tend to have less wage inequality, and this has been proven by most of the European countries.
Minimum wage not only affects workers who earn it, it also has a spillover effect to the workers who earn slightly above it. In 1 992, scholars from United States conducted a research in the fast-food industry after minimum Wage Was increased in that year, and they discovered hat when the level of minimum wage is increased, it created a spillover effect, which also increased the wages of workers whose wages are higher (Card and Krueger, 1995).
Regarding this phenomenon, the Ontario Ministry of Labor concluded that “it is likely that the immediate effect originates from a hike in the minimum wage which then ‘ripples’ through other wages just above the minimum wage… And since minimum wages increase wages at the bottom of the wage distribution, and likely those just above the minimum wage through spillover effects, increases in minimum wages are likely to exult in lower wage inequality. ” Thus, since the real minimum wage has been remained stable for over 40 years, it would not be surprising that it had negatively impacted the widening income inequality in Canada. . 2: Decrease in Unionization Rate Statistics have shown that Canadian private sector union membership has declined from 33. 4% of the workforce in the early sys to only 16% in 2009, and the magnitude is even bigger in United States (Stone, 201 1). The influence of union on wage structures has been receiving attentions from scholars around the world, and a number of studies conducted in recent years have covered that there is indeed a correlation be;en the rise in income inequality and the decline in unionization rate.
In the wage inequality study conducted in the united States, Canada, and the K, scholars have found that union’s effect in reducing wage inequality in all three countries could be proven throughout 1 sass and 1 sass (Card, Limited, and Iredell, 2004). In terms of Canada, a labor economist called Craig Iredell from the University of British Columbia estimated that about 20% of the increase in income inequality among Canadian male workers could be attributed to the decline in onion density (Meddlesome, 2011).
Union reduces wage inequality through both direct and indirect effects. On one hand, union could compress the wage distribution within its sectors, and at the same time, it creates a “threat effect” which motivates employers outside of the union coverage to increase their wages to remain competitive in the labor market. First, union tends to raise wages more for Iow- and middle-wage workers than for higher-wage workers, so it has direct effect in reducing wage inequality within union sectors.
According to the report released by Economic Policy Institute, in 1997, the onion wage premium for blue-collar workers was 23. 3% whereas the union wage premium for white-collar workers was only 2. 2%. Also, the 1997 union wage premium for workers with high school degree was 20. 8%, which was much higher than the 5. 1% premium workers with college educations (Michel & Walters, 2003). As a result, the earnings distribution within union sectors would be compressed and the wage inequality would be reduced among union members.
Besides direct redistribution of income within union sectors, union’s influence on Overall Wage and income inequality may also go beyond he workers covered by collective bargaining. Strong unions could create a “threat effect” on nonunion wages. When the core of the industry is unionized, it is very likely for the nonunion employers to either match or improve the wage and welfare for their employees so that these employers could remain competitive in the labor market.
In addition, when the unionization rate is high in an economy, unions could set out norms and standards in labor practice throughout the entire workforce. Research has proven that many workplace benefits, such as pensions and health insurance, ere first provided in union sectors before they become a general practice at workplaces. Also, the wage setting structure in unionized sectors has influenced the standards of what workers in other nonunion sectors expect from their employers.
According to scholars who conducted research regarding union’s influences, many sectors of the economy had followed the standards set in collective bargaining agreements until the mid-sass (Michel and Walters, 2003). Thus, the decline of unionization in recent years in Canada had contributed to the increase in wage inequality within the country. . 2: Increase in Labor Market Instability Although there is limited research in this area, one could argue that the human relations practices within a firm may play a role in the labor market popularization in Canada.
For example, the use of incentive pay could increase or decrease employee earnings at any point in time. In Kuhn, Catchalls & Mufti (1994) argue that the increase in labor market popularization in Canada can be attributed to the increase in earnings instability over time. Therefore, the increase Of contracting out and nonstandard work forms (such as emperors or part time work) could also lead to increased popularization since it offers less security to employees, even if they are senior or white-collar workers.
Although this is a relatively new suggestion and is traditionally under-studied in the literature, as the forms of nonstandard work increase and income instability is on the rise, the impact of these factors on the labor market could lend some useful insights into the causes labor market popularization. IV: Concluding Remarks: Possible Solutions If rusty, one way to affect the inequality of after-tax incomes is to adjust the never income distribution using the tax and transfer system to achieve the desired distribution.
Data from the Canada Revenue Agency (2011) has shown that among all the individuals filed tax return in 2009, 182,410 had income over the $250,000. These returns reported about $93. 6 billion in taxable income, which means that 548 billion was above the $250,000 threshold. According to the calculation of CRA, tax increase of 6 percentage points on this base would yield about $2. 9 billion in revenue, if taxable income remained unchanged. Although literatures have warned that the tax base is unlikely to remain unchanged, evidence suggested that labor supply of top earners would not be largely influenced by taxation.
This could because that the professionals and executives in top 1 percent are more intrinsically motivated by remaining top performer in their fields rather than by the monetary impact of a few of tax points (Portion, Green, Limited, and Mulligan, 2012). A second option to change after-tax incomes is by increasing transfers to Canadians living under low income standards. Adjustments to federal or provincial social assistance rates could help some people at the very bottom y transferring some of the wealth within the country to them.
For example, methods like HOST/GUST credit, the Canada Child Tax Benefit, or the Working Income Tax Benefit can be used to increase the wealth of low-income families. Although this option might be costly to the government, a well designed assistance program could indeed motivate some people’s participation in the labor force and thus increase the economic growth of the country. The Working Income Tax Benefit, for instance, pays no benefits unless someone is making more than $3,000 a year, and it pays more as a claimant earns more up until a certain limit.