Information identified as archived is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please "contact us" to request a format other than those available.
Inequality in after-tax family income has increased during the past 15 years, driven by widening differences in family market income, according to a new study.
The study documented trends in inequality using data from the Survey of Consumer Finances and the Survey of Labour and Income Dynamics.
It found that inequality in after-tax family income increased throughout the 1990s. It also sought to determine if this increase was the result of changes in family market-income inequality, or changes in the equalizing role of the tax-transfer system.
The study found that the increase in inequality was driven by an upward trend in inequality in family market income. Family market income is the sum of earnings from employment and net self-employment income, investment income, and private retirement income, for all family members.
On the other hand, while the tax-transfer system changed in many ways throughout the 1990s, it reduced income inequality by as much in 2004 as it did in 1989.
The trend in family market-income inequality does not appear to be primarily driven by rising differences in earnings among workers. It appears to be driven in part by increased inequality in family earnings. This would suggest that changing family characteristics, such as the increasing share of families with two highly educated earners, may be an important factor.
Virtually all the increase in after-tax family income inequality over the 1990s was driven by widening differences in family market income.
Average family market income among the 10% of families with the highest incomes rose by 22% from 1989 to 2004. Meanwhile, among the 10% of families with the lowest incomes, it fell by 11%.
Note to readersData used in this study come from the Survey of Consumer Finances (1976 to 1997) and the Survey of Labour and Income Dynamics (1993 to 2004). The study includes economic families of two persons or more and unattached individuals, referred to collectively as families. It is important to account for family size when examining the income of families. In this study, family income is adjusted for family size to compensate for economies of scale present in larger families and yields indicators that reflect family income defined on a per-person basis. Therefore, any reference to income in this study refers to "adjusted family income per person" unless otherwise noted. Family market income is the sum of earnings from employment and net self-employment income, investment income, and private retirement income from all family members. After-tax family income is the total of market income and government transfers, less income tax, for all family members. After-tax family income inequality could rise because of widening differences in family market income or because of changes in the equalizing role of the tax-transfer system. The tax-transfer system equalizes incomes because more transfers are received by lower-income families, raising their income, and more taxes are paid by higher-income families, lowering their after-tax income. |
Without an increase in taxes or transfers to families, this would result in a rise in after-tax-income inequality.
The study shows that by 2004, the tax-transfer system equalized incomes by about the same amount as it did in 1989. As a result, the increase in family market-income inequality was converted almost directly to an increase in after-tax family income inequality.
From 1989 to 2004, average after-tax family income in the top 10% of families rose by 24% and fell by 8% in the bottom 10%.
The ratio of after-tax family income of the top 10% to the bottom 10% rose from 6.6 in 1989 to 8.9 in 2004. The increase in this ratio was especially prominent in the second half of the 1990s, rising from of 7.1 in 1994 to 8.8 in 2000.
This trend in family market-income inequality extends back at least to the late 1970s. From 1979 to 1989, average market income in the poorest tenth of families fell by 18.7%, while it rose by 12.7% among the richest tenth.
The increase in family market-income inequality did not translate into an increase in after-tax family income inequality in the 1980s as it did in the 1990s.
This is because taxes and transfers both increased during that decade, increasing the share of income redistributed from high-income families to lower-income families.
The tax-transfer system would have needed to continue becoming more redistributive into the 1990s to neutralize the impact of rising market-income inequality in that decade.
The study's findings suggest that Canada's middle class, defined by income, became smaller during the 1990s, while incomes became more polarized.
For the purposes of the study, middle-class families were those who had after-tax income within a given range of the median — 75% of the median on the low side and 150% of the median on the high side. (The median is the point where exactly one-half of incomes are higher and one-half are lower.) After-tax income was adjusted for family size.
In 1989, 52.1% of Canadians had after-tax family income within this range of the median. By 2004, this proportion had declined to 47.3%.
The trend away from the middle-income families was both towards lower-income and higher-income families. The share of people in families with after-tax income below 75% of the median rose by 2.6 percentage points. The share with income above 150% of the median rose by 2.0 percentage points.
The research paper "Income inequality and redistribution in Canada: 1976 to 2004" (11F0019MIE2007298, free) is now available as part of the Analytical Studies Branch Research Paper Series from the Publications module of our website.
Related studies from the Business and Labour Market Analysis Division can be found at Update on Analytical Studies (11-015-XIE, free) from the Publications module of our website.
For further information or to enquire about the concepts, methods or data quality of this release, contact Andrew Heisz (613-951-3748), Business and Labour Market Analysis Division.