Income Inequality in Canada: Current Situation

Dominique Fleury
Aboriginal Affairs and Social Development

James Gauthier
Economic and Trade Policy Section

For a number of years, growing inequality has been at the forefront of public debate. Interest in this issue has increased in the wake of the last recession and because many respected organizations and economists have concluded that high levels of inequality negatively affect the economy.

A survey conducted in 2014 by York University revealed that close to four out of every five Canadians believe the income gap has grown in recent years and that governments can do something to reduce inequality. So what do the facts say?

Definition and measures

The concept of inequality refers to the difference in the way financial resources are distributed among individuals or households within a country or a region. While wealth (that is, assets minus debts) is a key part of financial resources, this document considers only income inequality.

In general, income inequality is measured using disposable income—that is, income after transfers and taxes—because this type of income better captures the income that households have to meet their needs.

Various indicators of inequality exist. While an in-depth understanding requires the consideration of more than one indicator, the most commonly used indicator is the Gini coefficient. It varies between 0, to indicate perfect equality (that is, everyone has exactly the same income) and 1, to indicate perfect inequality (that is, one person has all of the income and everyone else has no income).

Canadian trends and international comparisons

Figure 1 shows that income inequality was higher in Canada in the 2000s than it was in the 1980s.

It also shows that the rise in income inequality in Canada occurred mainly during the 1990s. Inequality, as measured using the Gini coefficient for disposable income, hit a low in 1989. It then increased during the recession of the early 1990s and during the economic expansion that followed in the late 1990s. Since the early 2000s, inequality has remained fairly stable, but at a higher level than in the 1980s.

Figure 1 – Income Inequality as Measured by the Gini Coefficient for Disposable Income and for Market Income, Canada, 1976 to 2011

Income Inequality as Measured by the Gini Coefficient for Disposable Income and for Market Income, Canada, 1976 to 2011

Source:   Figure prepared using data obtained from the Organisation for Economic Co-operation and Development, Income Distribution and Poverty, OECD.Stat. (2011 definition of income), consulted 2 November 2015.

Canada is not the only country where income inequality has increased in recent decades (see Figure 2). In 2013, the Organisation for Economic Co-operation and Development (OECD) concluded that, from the mid-1980s to the late 2000s, inequality rose in most countries for which long-term data are available.

Figure 2 – Income Inequality as Measured by the Gini Coefficient for Disposable Income, Various Member Countries of the Organisation for Economic Co-operation and Development, mid‑1980s, mid‑1990s, mid‑2000s and early 2010s

Figure 2 – Income Inequality as Measured by the Gini Coefficient for Disposable Income, Various Member Countries of the Organisation for Economic Co-operation and Development, mid 1980s, mid 1990s, mid 2000s and early 2010s

Notes:     The years indicated vary based on the data available for each country:
    • “mid-1980s” is 1985, with the exception of Finland (1986), Greece (1986), Italy (1987), Luxemburg (1986), Mexico (1984), Norway (1986), Sweden (1983) and the United States (1984).
    • “mid-1990s” is 1995, with the exception of Greece (1994), Luxemburg (1996), Mexico (1994) and the United Kingdom (1994).
    • “mid-2000s” is 2005, with the exception of Germany (2004), Italy (2004), Japan (2006), Mexico (2004), New Zealand (2003), Norway (2004) and Sweden (2004).
    • “early 2010s” is 2011, with the exception of Japan (2009), Mexico (2012), the Netherlands (2012) and the United Kingdom (2010).
Source:   Figure prepared using data obtained from the Organisation for Economic Co-operation and Development, Income Distribution and Poverty, OECD.Stat. (2011 definition of income), consulted 2 November 2015.

In 2011, the most recent year for which a Gini coefficient was published in Canada, inequality based on disposable income was very close to the OECD average. For example, it was higher than in Norway or Denmark, but lower than in the United Kingdom and the United States.

Evolution of employment and investment income 

Various hypotheses have been put forward to explain the widening income gap, ranging from globalization to technological changes to demographic trends. However, one of the most common reasons given is the growing concentration of income among high-income earners.

In Canada, growing inequality is largely explained by the fact that incomes increase more rapidly for those with the highest incomes than for those with lower or middle incomes.

Data from the World Top Incomes Database and a study published recently by the Institute for Research on Public Policy (IRPP) indicate that the share of employment and investment income held by the top 1% of income earners has increased drastically since the 1980s. In 2014, an OECD study reported that Canada was one of the countries where the increase in the share of overall income held by the top 1% of income earners was particularly prominent.

Role of transfers and taxes

Transfers and taxes play an important role in reducing income inequality, as evidenced when the Gini coefficient for market income (that is, before transfers and taxes) is compared with that for disposable income (Figure 1).

Using these types of comparisons, Statistics Canada researchers Heisz and Murphy conclude that, until the mid-1990s, increases in market income inequality in Canada were offset by a transfer-and-tax system that became more redistributive. They also note that redistribution through transfers and taxes declined after the mid-1990s, coinciding with an increase in disposable income inequality.

Heisz and Murphy also find that, beginning in the 2000s, market income inequality remained high but stable, with an increase in 2009 and 2010 that was offset by transfers and taxes.

In comparison with other OECD countries, the Canadian transfer-and-tax system plays a moderate role in reducing market income inequality. According to 2011 OECD data, income inequality for disposable income in Canada was 12 percentage points lower than for market income, while many other countries had a difference of more than 15 percentage points.

Potential impacts and proposed solutions

Until recently, the issue of growing inequality was studied primarily for social justice purposes or because of the negative social impacts that can result from it, such as rising crime and decreased social cohesion.

While there is no consensus on the optimal level of income inequality, respected research organizations (OECD, IMF, TD Economics) now highlight the negative effects of increasing income inequality on the economy.

Many of their new studies conclude that recent income inequality trends hinder economic growth. These studies suggest that increasing inequality reduces investments in education and social mobility for the most vulnerable people, and, in turn, limits their ability to reach their full economic potential.

To address these concerns, many research organizations are promoting inclusive growth policies, that is, growth that benefits the entire population, including the poor. It remains to be determined whether the implementation of such policy proposals would effectively reduce income inequality in Canada.

Related resources

Institute for Research on Public Policy (IRPP), Income Inequality: The Canadian Story.

Organisation for Economic Co-operation and Development (OECD), Divided We Stand: Why Inequality Keeps Rising, OECD publishing, 2012.

Report of the Standing Committee on Finance, Income Inequality in Canada: An Overview, Ottawa, December 2013.

The Conference Board of Canada, How Canada Performs on Income Inequality.

Miles Corak, Income Inequality, Equality of Opportunity, and Intergenerational Mobility, Journal of Economic Perspectives—Vol. 27, no 3, Summer 2013, Pages 79–102.