Prosperity, Innovation and Inequality

From the Occupy movement to debates at City Hall, there has been increasing media and academic attention surrounding the startling –and growing – levels of poverty and inequality in our Canadian cities. In many publications, Canadian cities were displayed in relation to the change over time, while others explained the social costs of the rising rates of inequality in cities such as Toronto. Recently, the Action Canada Task Force released a working paper entitled Prospering Together: Addressing Inequality and Poverty to Succeed in the Knowledge-Based Economy. This working paper describes levels of inequality both across the country as a whole and compared to other similar peer countries. The authors argue that the growing income inequality in Canada, especially compared to its peer countries is more than a social issue, but that it is negatively impacting the Canadian economy and innovation. The Martin Prosperity Institute is releasing this Insight to facilitate the continual discussion regarding inequality and poverty, and as a summary of a paper released by Action Canada.

The figure below displays the change in inequality per country from the mid 1990’s to the mid 2000’s. The table provides data which uses the Gini coefficient (after taxes and transfers), total population, and the top-20 OECD countries (GDP per head). The figure below was created by the Action Canada Task Force and can be found on page 10 of Prospering Together: Addressing Inequality and Poverty to Succeed in the Knowledge-Based Economy.

Exhibit 1: Inequality in the top 20 OECD countries, mid-1990 and mid-2000s

The figure shows that Canada has higher income inequality than 16 of its peer countries. Using the measurements applied by the authors, – Canada’s rate of inequality is around 0.34, compared to a score of approximately 0.26 in Denmark and Sweden. While the fact that Canada ranked 17th is in and itself a reason for concern, the authors also shed light on the fact that inequality in Canada on the whole is growing. The increase in inequality in Canada over the last 10 years was found by Action Canada to be one of the largest among the top 20 OECD countries The increase for Canada was even larger than the United States, a developed country which had no universal health care, less social services and the highest overall level of income inequality.

The authors found that from 1976-2009 two-thirds of Canadians experienced a decline in their real market income. During the same time, the wealthiest members of Canada added $35,000 to their average income, which was a 27.5 % increase. On the other hand, the remaining Canadians experienced an average 7.9 % decrease. It was found that while inequality in Canada is growing, poverty is also growing as out of the 20 countries studied, Canada ranks 15th in terms of poverty and 16th in terms of child poverty. One reason for this growth of inequality can be attributed to the disparity of increases in earnings. The authors demonstrate that while labour productivity increased over the last 25 years by 35.7 per cent, the increase in wages due to productivity growth was unevenly distributed. The median earnings of full time workers in Canada during this time only rose by 0.14% or $58, while individuals within the top quintile of incomes in Canada increased their share of overall after tax income from 44.7 % to 51.7%. This clearly demonstrates that for the majority of Canadian workers, the share of overall income decreased, increasing inequality.

What does this increase in inequality mean for Canada as a whole? It is argued that rising inequality has clear and profound impacts on the ability of the country to capitalize, and prosper, in the current economic system. The authors explain that human capital is important in the knowledge economy as the “knowledge, skills, competences and attributes” of people allow for innovation. As production evolves, successful countries will need to have a wealth of human capital to compete. For example, the investment into new technologies results in the need for workers capable of using them. New technologies and increased global productivity though, can lead to employees receiving high wages, thus increasing the income polarization between the few high skill workers and the increasing number of low skill employees. This creates a vicious cycle in which low-skilled, low-wage workers find it increasingly difficult to increase their annual wage. Inequality in turn hurts human capital and it becomes an obstacle of innovation as there are less educated people to allow for a flow of information and knowledge. As the Figure demonstrates, there is a high rate of growing inequality in Canada, which is not merely a social issue, but one that will have economic consequences.

Policy decisions must be made to create an environment in which everyone can contribute to and benefit from prosperity and innovation, with a reorganization of policy priorities to address these challenges. Further research is required into the root causes of inequality and poverty in order to begin to ensure that all Canadians are provided with adequate social mobility when needed. All levels of government in Canada, including Aboriginal groups must be engaged in creating policy to curb these issues. The governments then must engage with the general public, as they must be on board with the policy decisions that will affect themselves along with their country. Lastly there must be new research and analysis into inequality and human capital development, along with the agenda to report this to the public to create awareness. As the knowledge based economy grows, the timeline to address these issues becomes smaller. Therefore Canada’s success in this economy is based on its capacity to innovate, which is reliant on the creation of an environment that fosters human capital and the potential of our entire workforce.

To learn more about this research, read the full report here.

Download this Insight (PDF)

The Martin Prosperity Institute at the University of Toronto‘s Rotman School of Management is the world’s leading think-tank on the role of sub-national factors — location, place and city-regions — in global economic prosperity. We take an integrated view of prosperity, looking beyond economic measures to include the importance of quality of place and the development of people’s creative potential.