Income Inequality and Low Income in Canada: An International Perspective

by Garnett Picot and John Myles
Business and Labour Market Analysis Division
Analytical Studies Branch research paper series, No. 240

Context

Trends in low-income levels and income inequality in Canada are two of the more closely watched indicators of economic well-being. This study reviews recent evidence on low-income levels and income inequality in Canada, the United States and some European countries.

Objectives

The goal of this study is to answer the following questions :

1. Are inequality levels and low-income rates high or low in Canada by international standards?
2. What role does the tax/transfer system play in reducing low income or income inequality in Canada relative to European countries or the United States?
3. Has the low-income rate and the depth of low income risen in Canada during the past two decades?

Findings

Income inequality in Canada is higher than in Europe but lower than in the United States. In the late 1990s, families at the 90th percentile of the income distribution in Canada had incomes about 4 times higher than that of their counterparts at the 10th percentile. This ratio was 5.4 in the United States and 4.5 in the United Kingdom. In the mainland European countries included in the study, it ranged from 2.9 to 3.3 (Germany, Netherlands, Belgium, Finland and Sweden).

Canada largely avoided the rise in income inequality evident in both the United States and the United Kingdom throughout the 1980s and early 1990s. However, evidence indicates this began to change during the 1990s when gains associated with economic expansion in Canada went mainly to higher income families.

In addition, the mid-1990s saw an unexpected increase in the low-income rate in Canada as it deviated from its expected trend based on the unemployment rate. As unemployment fell in the mid-1990s, the low-income rate continued to rise.

This finding may be attributed to earnings difficulties among poorer families and declining social transfers in the mid to late 1990s. By 2001, the low-income rate appeared to be back to its expected long-term trend as indicated by the unemployment rate.

Most families that fall below the low-income cutoff do not remain in low income for long periods of time. However, 3% to 5% of the Canadian population stays in low income for four to six years or more. There is substantial variation in the persistence of low income among countries, with Canada again in the middle.

Data sources

This study reports data used in a variety of previous studies.

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