Since the Occupy Movement began in 2011, income inequality and the accumulation of wealth in the hands of a small group has remained a consistently newsworthy topic. Stephen Gordon, an economics professor at Laval University and one of the authors behind the economics blog Worthwhile Canadian Initiative, addressed these issues last night at the University of Toronto. Jointly hosted by the Centre for Ethics and the School of Public Policy and Governance, the talk was titled “Ethics and the Public Interest: The Canadian 1%.”
According to Gordon, one of the problems with inequality discourse is that it conflates two separate issues: first order inequality, which is the widening of the gap between the rich and poor seen in all industrialized countries, and the accumulation of wealth among top earners.The latter is a trend predominantly seen in English-speaking countries, and the focus of Gordon’s talk.
Gordon argues that the reasons for the phenomenon of top end wealth accumulation are very different in the U.S. and Canada. It is also important to understand that while historically wealth accumulation has primarily been the result of asset holdings, this changed after the Second World War, when wealth accumulation shifted from being over 50% asset dependent to being mostly wage dependent.
“The idea is that this is being generated by returns on capital and profits, [but] it’s hard to make that connection, which is somewhat counterintuitive. One of the Occupy themes was ‘people not profits,’ but profits wasn’t what was making these people rich–it was wages,” said Gordon.
In the U.S., top end wealth accumulation surged in the 1980s when the Reagan administration cut tax rates for the wealthy from around 70% to roughly 35%. Most of the top 1% in America are also employed in management roles. It can be argued that these tax cuts made bargaining for higher salaries and bonuses much more worthwhile for executives than they were previously.
In Canada, the story is very different. Wealth accumulation for Canada’s 1% surged in the 1990s, and coincided with the sharp depreciation of the Canadian dollar. Also, while management positions do account for 40% of the Canadian 1%, the result is a much lower share than in the U.S. The top 1% in Canada are composed of a fairly diverse combination of people in management, health services, professional services, the finance industry, and manufacturing.
According to Gordon, these two facts are a key part of why wealth accumulation for Canada’s top earners happened for a very different reason. Gordon argued that fear of a brain drain in Canada has kept wages for a range of different professions high. To emphasize his point, he quoted a recent article in Canadian Public Policy by Nicole Fortin, David A. Green, Thomas Lemieux, and Kevin Milligan: “Because top income earners are such a diverse group it is hard to come up for a simple explanation for the growing incomes at the top end. A reasonable candidate explanation is that, like hockey teams, Canadian corporations have little choice but to pay higher and higher salaries to keep their top players who would otherwise be lured away by ever growing salaries across the border.”
The best evidence in support of this theory is the wage discrepancy between Canadians outside Quebec, Anglophones in Quebec, and Francophones in Quebec. During the period in the 1990s when the Canadian dollar depreciated, incomes surged among the top 1% across Canada, but were particularly high among Anglophones in Quebec while Francophone wages stayed fairly constant. This could mean that English-speaking Canadians posed a credible threat of leaving to work in the U.S., while Francophones, who may place a higher value on their culture and French education system, were less likely to leave.
Additionally, as the Canadian dollar began to rise again, the Canadian top 1% experienced a shrinking of their total income share. While the income of the top 1% didn’t actually decrease, they no longer posed an imminent threat of leaving the country.
What does this mean for the ethics of top end wealth accumulation? In economics, the idea of rent is the notion that payments are being made in excess of what is necessary to keep people at their most productive. While American executives, who pushed for higher salaries and bonuses, were rent-seeking in that they would have stayed at their company regardless of the income increase, the Canadian 1% could have sought out different employment. Because the Canadian 1% posed a credible threat of moving to the U.S., their salary increases were justifiable.
Inequality continues to be a major issue in both countries, but Gordon suggests that Canada should focus should on reducing first order inequality rather than the issue of wealth accumulation among the top 1%. The Nordic model has been successful at reducing first order inequality through a similar taxation rate as Canada, but with much higher cash transfers funded by high sales taxes, which function as a secondary income tax.
Margaret Campbell is a Master’s of Public Policy candidate for 2015. She graduated from Carleton University with a Bachelor of Journalism, Combined Honours, Journalism and Law in June 2013. Margaret’s academic interests include criminal law reform, gender equality, and education policy.