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Canadian Income Distribution

What is income inequality? And what is the issue of income inequality in Canada?

  • Income inequality refers to the difference in how income is distributed among individuals in society. Income is defined as household disposable income in a particular year. It consists of earnings, self-employment and capital income and public cash transfers; income taxes and social security contributions paid by households are deducted. The income of the household is attributed to each of its members, with an adjustment to reflect differences in needs for households of different sizes.
  • Income inequality among individuals may be measured by different indicators. One of the most used indicators of inequality is the Gini coefficient, which is based on the comparison of cumulative proportions of the population against cumulative proportions of income they receive, and it ranges between 0 in the case of perfect equality and 1 in the case of perfect inequality.
  • The average income in Canada stands at 44000 Canadian dollars, but economic resources are not evenly distributed in Canada. Income inequality in Canada is close to the OECD average and lower than in the United States (the Gini coefficient in Canada stands at 0.315 compared to 0.317 in the OECD and 0.401 in the US).
  • Income inequality increased considerably in Canada in decade of the 1990s, reflecting both an increase in market income inequality and weaker impact of redistribution through taxes and transfers. Since the 2000s, income inequality in Canada remained close to the OECD average.
  • Canada is one of the few OECD countries where inequality did not increase throughout the crisis. This is partly explained by stagnating incomes at both ends of the income distribution and a slight increase (1%) of incomes in the middle of the distribution between 2007 and 2011.
  • In Canada, the average income of the top 10% of income earners is 8.6 times higher than that of the bottom 10%, compared to a ratio of 9.6:1 on average in the OECD. In the 1990's the Canadian ratio stood at 7:1.
  • The OECD defines the poverty line as half the median household income of the total population. A household is considered poor by the OECD if its disposable income is below the poverty line. For a household of four people the poverty line in Canada stands at 38000 Canadian dollars a year. Children are the population group at greatest risk of poverty (14.4%) in Canada, followed by young people aged 18-25 (13.1%). Across the OECD, these rates are 13.3% and 13.8%, respectively. Canadian working age adults also face slightly higher poverty risk than the average OECD workers (11.8% versus 9.9%). By contrast, elderly Canadians (65+) are facing lower poverty risks than the average OECD retiree (6.7% compared to 12.6%).

Why is income inequality important for Canada?

In Canada, the pay gap between standard (i.e. workers in full-time open-ended contracts) and nonstandard workers (i.e. workers in temporary work, part-time work or self-employment) is especially wide. While a non-standard worker in the OECD earns on average 75% of the hourly wage of a standard worker, s/he earns only a 57% of a standard wage in Canada.

Canada is the country with the highest rate of poverty for non-standard workers among OECD countries (35%, compared to an OECD average of 22%). About 18% of Canadian households with workers in non-standard arrangements are lifted out of poverty by tax and transfer in Canada, compared to one third across the OECD. And only 13% of jobless households move out of poverty after social transfers, while this is true for 50% on average across the OECD.

In Canada, the tax and benefit system does not reduce inequality and poverty as much as in other OECD countries. Tax and transfer reduce market income inequality by 22% in Canada, compared to 27% on average in the OECD. As a comparison, countries like Finland, Germany or Belgium record similar levels of market income inequality, but achieve lower inequality levels after tax and transfers. The redistributing impact of tax and transfer declined steadily during the 1990s (from 28% to 22%). It kept stable over the 2000s, and increased slightly during the crisis.

Canada performs well in terms of women's participation to the labour market. Nevertheless, the gender pay gap is the 7th largest within OECD countries. Despite a marked decline since 2000, the gender pay gap, i.e. the difference between male and female median wages reaches 19% in Canada in 2013, against 15% on average in the OECD.

Methodology and conceptual issues

There are a number of conceptual issues to take into account when trying to define how rich or poor someone is relative to the rest of the population. To help you better understand our methodology, here are some of the questions we considered when building Compare your income

Where do the data come from?

Most of the data on the actual distribution of income are drawn from the OECD Income Distribution Database. This database is based on national sources (household surveys and administrative records) and on common definitions, classifications and data-treatments. The method of data collection used for the OECD Income Distribution Database aims to maximise international comparability as well as inter-temporal consistency of data. This is achieved by a common set of protocols and statistical conventions (e.g. on income concepts and components) to derive comparable estimates. Due to the increasing importance of income inequality and poverty issues in policy discussion, the database is now annually updated. The OECD is currently working on extending its database to a number of other key partner countries.

How is income defined and why do we consider net income?

The definition of income used here refers mainly to cash income - excluding components such as imputed rents - regularly received over the year. Net income is defined as total market income (i.e. gross earnings, self-employment income, capital income), plus the current transfers received, less the taxes and social security contributions paid. This is the income that people have available to buy goods and services, so it is a better measure of material living standards than pre-tax income or some measure of earnings alone.

Why is income measured at the level of the household?

The welfare of an individual in a household will depend not only upon their own income, but also on that of other household members. By measuring income at the household level, we are implicitly assuming that all individuals within the household are equally well off and therefore occupy the same position in the income distribution. In practice that might not be true, but it is the least arbitrary assumption that we can make based on the available data.

The OECD Income Distribution Database provides information on the equivalised disposable (i.e. net) income. 'Equivalising' means adjusting a household's income for its size, so that we can look at the income of all households on a comparable basis. The needs of a household grow with each additional member but - due to economies of scale in consumption- not in a proportional way. Needs for housing space, electricity, etc. will not be four times as high for a household with four members than for a single person. With the help of equivalence scales each household is assigned a value in proportion to its needs. The equivalence scale used in the OECD Income Distribution Database divides household income by the square root of the household size. This implies that, for instance, a household of four persons has needs twice as large as one composed of a single person.

To bring back data at the household level, we then multiply income statistics available in the OECD Income Distribution Database by the square root of the household size. For instance, in the case of a household consisting of a couple with two children, we multiply the income data from the OECD Income Distribution Database by two (i.e. square root of four).

How is the poverty line computed?

We compute the income needed to be considered non-poor as half the median income of households of the same size of the respondent's. The median income is the income that divides the income distribution into two equal groups, half having income above that amount, and half having income below that amount.

Data on median income come from the OECD Income Distribution Database

How are 'income diagrams' computed?

In order to further compare the perceived inequality in a society with the actual distribution of income, we divide the population into seven income classes. The 'lower-income' class (lowest bar) covers all individuals with a net income below 50% of median income of the total population. Therefore, the demarcation of the lowest group is equal to the definition of poverty used in this tool. The 'average-income' class covers all individuals with a net income between 50 and 150% of the median income and spans three bars: from 50 to 80% of the median income; from 80 to 110% of the median income; and from 110 to 150% of median income. Similarly, the 'higher-income' class identify all individuals with a net income above 150% of the median income and covers the three highest bars of the diagrams: from 150 to 200% of the median income; from 200 to 250% of the median income and above 250% of the median income.

Obviously, the demarcation of classes remains somewhat arbitrary. However, the demarcation of single groups is not the focus of our analysis. The intention of the definition of these income classes is basically the graphical illustration of the density function of incomes.

Drawing such income diagrams requires information on income at the percentile level, which is currently not available in the OECD Income Distribution Database. For most OECD countries, information on income percentiles have been provided to the OECD by national data providers, and is based on those national sources that are deemed to be most representative for each country. Such information is currently not available for four OECD countries: Chile, Japan, Korea and Turkey.

To which year do data refer?

The information available in the OECD Income Distribution Database is more up-to-date when compared to information available through many other statistical sources, but still reflects the long time-lags that characterise data collection in this field in most OECD countries. For most countries data on income and poverty shown in this tool refer to 2013 or 2012. To bring the figures up to date, we have adjusted them in line with changes in the consumer price index for all goods up to 2014.