By Michael Wolfson
For many Canadians, the outcome of the United States election has been a shock. Trump’s campaign, as inarticulate and venal as it was, tapped into important and deeply rooted realities, realities that may contain lessons for Canada too.
Does Canada need to worry about the same festering malaise that has become so dramatically evident in the U.S.? Powerful international data on income inequality offer significant insights.
Branco Milanovic, a leading economist, has been producing some of the best research on world income inequality, drawing on detailed data from his years at the World Bank.
Milanovic has produced a remarkable graph – he calls it his “elephant graph” for the shape it takes. It includes income distribution data from almost all of the world’s 200 countries and asks a simple question: how much have individuals’ incomes grown between 1988 and 2008?
To answer this question, Milanovic divided each country’s population into smaller groups, determined each group’s income measured in standardized U.S. dollars in 1988, and then sorted them in increasing order of their income. In other words, the world’s population has been ranked from poorest to richest, regardless of nationality. The graph then shows how much each group’s incomes grew over the two decades from 1988 to 2008.
The global average income growth for all the income groups was about 25 percent – not bad at about two percent real growth per year. But these improvements were very far from being evenly distributed.
Among the bottom fifth of the world population, incomes grew at rates between 20 and 40 percent – lifting hundreds of millions out of poverty.
Incomes around the mid-point of the world’s income spectrum grew twice as fast over this two-decade period, at 80 percent. This growth signals dramatic improvements in living standards for many living in what we used to call the less-developed world, and it reflects the emergence of a much larger middle class in many countries. This is all very good news.
But there is a dramatic drop in the income growth rates for individuals in the upper ranges — except at the very top. For individuals whose incomes placed them in the top 75 to 85 percent, their incomes hardly grew at all, and those whose incomes are in the top 85th to 95th percentiles of the world’s population saw their incomes grow by only 10-15 percent over a 20 year period – almost stagnant, in other words.
Only for the top five percent of income recipients was income growth above 20 percent, and it was most dramatic among the top one percent of the world’s population — at a staggering 60 percent or more.
So who exactly are these big winners and losers?
Milanovic’s analysis places the newly emerging Chinese middle class at the peak of this curve (near the elephant’s head), with a growth rate in their incomes around a dramatic 80 percent. At the trough of the income growth curve you’ll find the U.S. lower-middle class — many of Trump’s core supporters — with essentially zero growth in their incomes.
In other words, the Chinese middle class has blossomed economically while working class America has stagnated.
Where does Canada fit on the curve?
Canada is very well-off in global terms – even those in our lowest income groups have an average income well above most of the world’s population. Unpublished data provided to me by Professor Milanovic show that Canada’s median incomes would put us at about the 93rd percentile of the world’s income distribution.
From this view, it may seem Canadians should have no complaints. But look more closely and there is pause for concern. Our pattern of income growth and inequality largely mirrors what is happening globally – dramatic income growth at the top, with only modest gains lower down the income spectrum.
The bottom three fifths of families saw their incomes grow by nine to 15 percent over this same 20-year period. The second highest fifth did a little better with their income growing by 19 percent — while the top fifth saw their incomes expand by 35 percent, two to three times as much growth as those in the bottom 60 percent.
There is some comfort. Canada’s income inequality is considerably less than that of the U.S. We have stronger social safety nets, greater longevity and significantly more equitable education.
But in this global context, we cannot afford to be complacent.
Without more vigorous actions to counteract increasing inequality among Canadians, we risk growing the same kinds of resentment and malaise here.
Michael Wolfson is an expert advisor with EvidenceNetwork.ca and holds a Canada Research Chair in population health modeling/populomics at the University of Ottawa. He is a former assistant chief statistician at Statistics Canada, and has a PhD in economics from Cambridge.