EC246: Income Distribution

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EC246 Income Distribution

• Income Inequality in Canada

2
Market income

• Closely tied to labour market conditions
• High overall LF participation rate (67.5)
• High employment rate (62.4)
• Unemployment rate 7.6
• Mean (households gt2) 64,900, (56,300 in
  1996)
• Mean (2 parent families) 80,400
• Strong growth in lone-parent families income
  23,800
• Unattached individuals 25,600
• Women 27,500 Men 31,900
• Strongest growth has been AB, SK and NS
• Lowest has been in BC, PEI, NB

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Chart 2.3. Average market income by major family
type, 1996 and 2003


2003 constant dollars
Unattached individuals
Elderly families
Married couples
Two parent families with children
Lone parent families
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Chart 2.4 Share of market income by quintiles,
1996 and 2003
Market income share
50
1996

2003
40

30

20

10

0
Fourth quintile
Third quintile
Highest quintile
Second quintile
Lowest quintile
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Chart 3.2 Market income and government transfers
by after-tax quintiles

• 85 of total income of female lone parents was
  from government transfers.

Highest quintile
Lowest quintile
Fourth quintile
Third quintile
Second quintile
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Chart 4.3

• 85 of total income of female lone parents was
  from government transfers.

Share of income
50
Market

Total
40

30

20

10

0
Fourth quintile
Highest quintile
Second quintile
Lowest quintile
Third quintile
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Chart 5.1 Average income tax
2003 constant

Economic families
Unattached individuals
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Chart 6.2 Market, Total, After tax income
2003 constant

Total
Market
After tax
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Chart 6.7 Share of Market, Total and After tax
income
Share of income
50
MarketTotalAfter-tax

40

30

20

10

0
Fourth quintile
Highest quintile
Second quintile
Lowest quintile
Third quintile
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Interpretation

• Cannot say the effect of the tax-transfer system
  is shown by differences in distributions
• Do not observe a pre-tax distribution
• Taxes and transfers affect behaviour
• Employment insurance may increase length of
  unemployment spells
• Statutory incidence not the same as actual
  incidence
• If executives are internationally mobile, their
  incomes will be adjusted to compensate for tax
  differences across countries

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Chart 7.1 After tax income by quintiles
2003 constant
Fourth quintile
Highest quintile
Second quintile
Lowest quintile
Third quintile
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Chart 7.3 Kuznets ratios
Average income ratio Highest to lowest quintile
(8020)
Market income
After-tax income

1999
1995
1997
2001
1993
2003
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Chart 7.4 Gini coefficients

• Market income stable at 0.44
• After-tax income 0.3 from 1992-1995, then rose
  to 0.32-0.33 by 1997 and have stayed there

2003
1993
2001
1997
1999
1995

• Note A difference of 0.01 in the Gini is
  usually statistically significant

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Comparison with Census (adjusted)
Source Milligan et al (2005)
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Comparison with Census

• Census
• Inequality higher
• More cyclical
• Stronger increases in inequality
• 1980s strong increases in market income
  inequality fully offset by tax/transfer system
• 1990s equally strong increases in market income
  inequality not offset to same degree

Source Milligan et al (2005)
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Low income

• Predictors of low income
• Lone parent (esp female)
• Decline in low income among female lone parent
  families due to big increase in employment
• Unemployment
• Low income rates

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Persistence of low income

• In any given year, x in low income
• One third of those were not in low income the
  year before, and one third were not in low income
  the year after
• In a six year period (1996-2001), 25 experienced
  low income at least one year
• 30 of children

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Persistence of low income (Canada)
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SCF vs Census (source Milligan et al.)
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Gottschalk

• US
• 1950s and 1960s rapid growth in mean, little
  increase dispersion resulting big decrease in
  poverty
• 1970s-1990s slow growth in mean, big increase
  in dispersion resulting resurgence of poverty
• Rising inequality tends to focus on labour market
  earnings, not family income
• To model family income, need to have idea of what
  determines household formation and
  intra-household fertility and labour supply
  decisions

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Gottschalk

• Changes in lifetime incomes at bottom affected
  by
• Change in mean incomes (economic growth)
• Change in inequality (distribution)
• Change in mobility (how long you are likely to be
  at the bottom)
• US Growth in real weekly wages between 1973 and
  1994 was higher for those at higher percentiles
• Negative real wage growth for almost all males
  only 80th percentile and up had real wage growth
• Gap between female and male earnings (adjusted)
  fell from 60 in 1963 to 40 in 1993
• Gap between non-black and black male earnings
  fell from 40 in 1963 to 15 in 1975, but no
  improvement since

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Gottschalk

• Big part of increase in inequality is returns to
  education
• From 1963 to 1979, college premium was falling
• Shot up rapidly during the 1980s
• Mostly due to declining real earnings of high
  school dropouts and graduates
• Also within-group (residual) inequality
• Increases in Kuznets ratios among individuals
  with identical education, experience, and other
  observables
• Returns to unobservable ability?
• Instability in earnings?

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OECD

• Big increases in inequality in
• US, UK, Canada, Australia, NZ, Israel
• Decentralised labour market?
• Small increases in inequality in
• Nordics, Netherlands, France, Italy, Japan
  (mostly later than US)
• Not much change
• Germany
• US almost only one to have as big an increase in
  after tax income as market income
• Mobility doesnt change the story much (seems
  to have either not increased or to have decreased)

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US Mobility Matrix (PSID)
Source Gottschalk (1997)
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Income distribution at the very top

• Key features of patterns in income inequality in
  past 80 years
• Counter-cyclical pattern of top income shares
  (except among very top)
• Sharp fall of top shares during WWII (biggest at
  top)
• Surge in top shares over last 20 years (biggest
  at top)
• Dont pick this up unless youve got tax
  (Census?) data

Saez and Veall (2005), AER
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Income distribution at the very top

• Increased inequality in 1990s reflects permanent
  earnings variation, not short-term fluctuations
• Almost all the increase in income share going to
  the top decile went to the top percentile
• Individual in top 0.01 of population had an
  income as a share of average income of
• 1920 200
• 1972 40
• 2000 190

Saez and Veall (2005), AER
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Income distribution at the very top

• Who are the top income earners?
• WWII (1) businessmen and rentiers (2) self
  employed professionals and entrepreneurs (3)
  well compensated employees.
• Canada has more employees at the top than US or
  France
• Now increased share of wage income for
  everyone. Fall in entrepreneurial income. Share
  of capital income has fallen for top groups.
  Reflects fall in large capital holdings, not
  capitals share of overall income

Saez and Veall (2005), AER
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Income distribution at the very top

• Reasons for changes
• Taxes?
• Drawn along with US because of exit option?
• Reasons
• Only at the very top (more mobile) unlike in the
  US
• Surge in top income started earlier in the US
• Not as much of an increase at very top among PQ
  francophones, but there is for anglophones
• But whats driving the US?
• Skill biased technical change?
• What about France? Why only at the very top?
• Stock options?

Saez and Veall (2005), AER
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Basic facts

• Relative price for more educated workers has
  increased
• Relative supply of more educated workers has
  increased
• Decline in absolute real wages for less educated
• Similar changes in much of OECD

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Friday tutorials

• Before coming to class please learn how to do the
  following on your computer
• Highlight a range of cells
• Calculate the average of data contained in a
  range of cells
• Excel average(a10a20) calculates the
  average of data in cells a10 to a20
• Adding a worksheet (Excel only?)