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Is Income Inequality Greater In US Or Canada?

Is Income Inequality Greater In US Or Canada?

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Income before (green) and after (pink) taxes and Transfer payments for different income groups. Starting with the lowest quintile.

Canada and the United States are often considered very similar in terms of economic development. According to the World Income Database (WID), the United States and Canada hold forty-seven percent of the top ten percent of the national income share in 2016, showing that the two countries are very similar. Both countries have had considerable increases in such in the last few decades due to a variety of factors including technological advances and the 2008 financial crisis (Consensus Economics).

Canada was a notable exception to the international effects of the financial crash, as will be discussed more later in this paper. As seen in figures 1 and 2 below, the income inequality between the two countries has increased dramatically since the mid-1970s as the difference in the Gini coefficients (figure 2) increases as time moves forward (US Census Bureau). 

Figure 1 Figure 2

Figure 1 (above) shows the median income of both countries with a notable increase in Canada’s income around 2008 as the United States’ begins to drop steeply (US Census Bureau). Although this holds true, income inequality around the same time for the United States increases whereas in Canada, it levels off and does not increase.

Despite the similarities to the United States in technological and economic development, Canada has had consistently and considerably lower income inequality than the United States in the last few decades. Therefore, although the two countries are broadly similar when it comes to economic development, they have a few key differences that have a heavy effect on the difference in their income inequalities inducing healthcare expenses, education expenditures and consequences, and reactions to the 2008 stock market crash, which ultimately causes Canada to have less income inequality. 

Let’s compare and contrast income inequality in the United States and Canada in the last few decades.

And moreover, take a closer look at the key factors that have caused such disparities. It will also include factors that influenced one country but not the other including the differences in living standards, accessibility to necessities, and the results of the 2008 financial crisis. First, it will discuss the differences in living between the two countries. Then, it will examine the effects of the 2008 financial crisis. The paper concludes with a summary of the findings. 

Differences in Living between Canada and the US 

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CBO chart shows the cumulative increase in real household income by income quintile. From 1979 to 2016. For income before taxes & transfers and after-tax income. It shows that even lower income quintiles still had sizable gains in income, although not as great as the top quintile.

Health Care 

As established, although both countries have experienced rising levels of income inequality in the last fifty-odd years, Canada has remained significantly lower. Part of this is due to the differences in healthcare obligations. For a United States citizen, healthcare comes with a cost of many thousand dollars whereas in Canada, there is a universal public healthcare system in place (Murphy, Wilson 16-17). 

In both countries, the standard of health becomes impacted by income.

Although both countries have similar findings in each category, Canada has generally higher positive results (JCUSH). 

For less than the median income, Canadians report 4 more percentage points in feeling “very good or excellent” and 2.9 percentage points less in the “poor or fair” category (JCUSH). In Canada, there is also a lower difference between the mean incomes of above and below the median income. The United States has a 67.9 percent difference whereas Canada is only 55.6. These findings show a trend of a lower gap in mean income resulting in a higher standard of health. 

Findings reported from the Organisation for Economic Co-operation and Development (OECD) state that there have been exponentially higher spendings on health-related care and emergencies in the last ten years. In 2019, the expenditure on health for Canada was 4,996.61 USD (adjusted for inflation) and for the United States was 11,071.70 USD (OECD). At the beginning of the decade in 2010, both countries paid significantly less. Canada spent 3,944.75 USD (adjusted for inflation) and the United States spent 7,992.2 USD (OECD). However, the dollar difference between the two countries increased by 2,027.64 USD (6075.09 – 4047.45) between 2010 and 2019. Canada’s cost increased by 26.7 percent in the last ten years whereas the United States’ increased by 40.1%, a little over 1.5 times that of Canada.

However, for out of pocket expenditures, the United States’ citizens pay less of their current expenditures than Canadians.

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Share of income of the top 1% for selected developed countries, 1975 to 2015.

The OECD reports that Americans spent 3.9 percent less than Canadians in 2018, which is not too much more than the 2.9 percent difference in 2010 (OECD). Although the percentage increase is more, Canadians paid less in the plain dollar amount than Americans and have been since 2010 (OECD). 

As of 2009, Canada offers 12 weeks of job protection when sick as well as 22/50 paid days for cancer treatment whereas the United States offers neither, or no paid sick days at all (Earle, Heymann, Rho, Schmitt 7,10). In the last 20 years, Canadians have consistently been absent from work more than Americans with 34 percent more Canadians reporting an absence in 2000, 92.1 percent more in 2010, and 102.5 percent more in 2018 (OECD). This data directly correlates with the fear American citizens have regarding taking leave from work even when sick as they fear not being paid, or even worse, losing their jobs. 

These trends in health expenditures correlate to income inequality in the two countries.

When looking at the early of 2010s, the Gini coefficient (for disposable income and after taxes and transfers) for the working population in Canada was 0.325 in 2014 and decreased 3.5 percent to 0.314 in 2017 (OECD). On the other hand, for the same group, the Gini coefficient in the United States increased by 8.8%, from 0.352 in 2014 to 0.383 in 2017 (OECD). In other words, income inequality in Canada has decreased over time whereas in the United States, it has increased. The chart below correlates the trends in healthcare expenditures and the change in income inequality in the last few years. 

Country Gini Coefficient Healthcare Expenditure Sick Days Change Change1(2014-2017) Reported (2014 v. (2014-2017) 2017)
Canada United States -3.5% -0.5% 7.4, 8 +8.8% +0.3% 3.7, 3.6
Figure 3 1 Share of current expenditures on health. Numbers derived from the OECD.

In Canada, as inferred from Figure 3, as income inequality decreased, the percentage of total expenses that went towards healthcare expenditures decreased as well. However, the number of sick days reported went up by 8.1%. On the other hand, as income inequality increased, the percentage of earnings that went towards healthcare increased as well. At the same time, the number of sick days reported decreased by 2.8%. Such analysis shows that the number of sick days reported may have gone up in Canada due to definite job security. In the United States, although there was a fairly small change in healthcare expenditures, there was still an increase in the cost. The cost of that increase must then be covered by other means, or working more days which results in taking less sick leave. 

Education 

Like healthcare, patterns in earnings and education and the gaps between such of each graduate-level correlate with the overall income inequality of each country. As found by the OECD, there is already an 11 percent difference between the relative earnings of the lowest education level (below upper secondary education) earners. Canadians at this level make a relative 65 percent when Americans only make 54 percent (OECD). This percentage difference increases drastically when approaching the level of having a doctorate or master’s degree. At that level, Americans are making more relative income. When in Canada people make 160 percent, Americans are earning 236 percent which results in a whopping 76 percent more earnings than Canadians (OECD). When comparing these two education levels, Canada has a 95 percent increase as Americans have a 182 percent increase. 

In both countries, higher education levels result in higher relative earnings.

However, as evident in the previously mentioned numbers, the United States has a much bigger gap between the earnings from the lower level educated workers and the higher level educated.

The differences in the change in the earning gaps is an indicator that those who are more educated earn considerably more income than those who are less educated. Although this holds for both Canada and the United States, the latter still has 87 percent more than Canada’s increase. 

However, this is not nearly proportional to the money and resources invested in education from each country. For tertiary education (education past high school) in 2011, Canada devoted 57.37 percent to higher education whereas the United States invested 34.8 percent (OECD). The price of higher education in Canada is much lower than that of the United States, even for international countries. The average cost of a year of undergraduate tuition in Canada is CA$6,580, or about $5057 (Statistics Canada). In the United States, yearly tuition can near $80,000.

Moreover, given all of this information, it is inferred that Canadians are likely to graduate with much less student debt than Americans.

As a country, Canada has accumulated CA$15B, or USD 11.5B (Canadian Federation of Students). Unsurprisingly, the United States is $1.6T (trillion) dollars in debt, about 140 times more than Canada’s (Friedman). As mentioned previously, this is more likely than not due to the number of resources Canada invested in education in the first place, therefore lowering the cost of enrollment and hence lowering overall student debt. 

Relating to the earning gaps between the two countries as the level of education increases, recall that Canada has had consistently less income inequality than the United States. As of 2017, the United States’ Gini coefficient was 0.069 higher than Canada’s (OECD). The vast differences in the gap between the lowest and highest earners and their education levels as noted above are part of why there is more income inequality in the United States.

2008 Financial Crisis and Stabilization 

After the 2008 financial crisis that greatly impacted most of the world, the United States’ income inequality increased as a result of rising unemployment. According to the OECD, the Gini coefficient rose 0.007 points between 2007 and 2009. In Canada, the Gini coefficient rose by 0.004 (OECD). As per those numbers, there didn’t appear to be too much of an increase in inequality. 

Figure 4 (below) compares the Lorenz curves of Canada (blue) and the United States (orange) (World Bank via IndexMundi). Around 2008, when the crash occurred, the curve for the United States moved downwards very slightly. 

Figure 4 

The reasoning for this is because as many higher-level workers were put out of the job. As those jobs were lost or people picked up lower-paying jobs, the Gini inevitably reduced. However, the curve for Canada remains almost completely constant and inequality does not appear to change. 

Canada was one of the few exceptions to the effects of the 2008 market crash. Partially due to Canada’s federal government being able to charter and control banks (Bordo, Redish,

Rockoff 3). This essentially means that the government has full power over how the banks are treated (like companies or businesses), and the United States did not follow the same action. After the recession hit, the rate of employment in both countries decreased. However, employment growth in the United States continued to fall after 2008. And did not reach the starting index (100) until after 2014 (Statistics Canada). Figure 5 (below) shows that although Canada also showed a slight decrease in employment growth after 2008, it recovered back to the beginning index (≅103) before 2011 (Statistics Canada). 

Figure 5 Figure 6 

Figure 6 shows similar information to what was just mentioned. As shown, both country’s employment rates drop after 2008, and neither recover back to their starting percentages in 2007. Canada’s rate drops by about 2 percent before leveling off between 62 and 63 percent (Statistics Canada). The rate for the United States decreases by about 4.5 percent before reaching 59% by 2014 (Statistics Canada). Though Canada had a slightly larger employment rate at the time these statistics were measured, the employment rate in the United States still fell more and recovered less.

Figure 7 

Figures 5 and 6 show the general trends throughout the entire labor force of both countries. However, the drop in employment does not hold for all age groups. As shown in Figure 7 (above), the employment rate after the recession did not have a negative change for workers over the age of 54 (Statistics Canada). 

Even so, the net negative change in percentage points was more for the United States than for Canada in all age groups. Canada saw a change of -7 percentage points when the United States saw a change of about -9.5 percentage points. From the previous sections, recall that (as a general rule) those who have higher education are likely to be older and may have job seniority and job security. Of course, this does not pertain to only the United States and Canada but throughout the world. This negative change for some age groups combined with the positive change (+3 CA, +1 US) undoubtedly widened the earnings gap for both countries, thus raising the Gini coefficient (Statistics Canada). Again, because this change (and the change in employment rates) was larger for the United States than it was for Canada, Americans suffered from more income inequality. 

Conclusion and Summary of Findings

The United States and Canada are both very economically developed countries and are therefore often grouped when being compared to other countries. Though they share this similarity, it was found that Canada has less income inequality. The OECD reports that Canada’s Gini coefficient was 0.314 in 2017 and showed a trend of decreasing whereas the United States’ Gini coefficient was 0.383 the same year and showed an increasing trend.

In Canada, as the Gini coefficient decreased, the cost of healthcare expenditures (per capita) decreased as well but in the United States, it was the exact opposite. Similarly, differences in healthcare expenditures and education correlated with these trends. It was found that though both countries had a trend of increasing income as the level of education increased, the differences in the gap between the lowest and highest earners and their education levels for Canada was much lower than for the United States (OECD).

In conclusion, there were also differences in how each country’s economy reacted to the 2008 financial crisis, and the change in unemployment rates following the crash was much larger for the United States than it was for Canada. Despite being so similar in economic development, these few factors were determinants in understanding how the income inequality in Canada has decreased over time and remained lower than that of the United States.

Is Income Inequality Greater In US Or Canada? Written by Aimee Lookman

Works Cited 

Bordo, Michael D., et al. “Why Didn’t Canada Have a Banking Crisis in 2008 (or in 1930, or 1907, or …)?” The Economic History Review, vol. 68, no. 1, 2014, 

doi:10.1111/1468-0289.665. 

“Canada-United States GINI Index (World Bank Estimate) – Country Comparison.” IndexMundi, 1 Jan. 2020, www.indexmundi.com/facts/indicators/SI.POV.GINI/compare? country=ca#country=ca:us

Canadian Federation of Students. “Student Debt in Canada: Education Shouldn’t Be a Debt Sentence.” Cfs-Fcee.ca, 2005, 

cfs-fcee.ca/wp-content/uploads/2018/10/Factsheet-2015-05-Student-Debt-EN.pdf. Friedman, Zack. “Student Loan Debt Statistics In 2020: A Record $1.6 Trillion.” Forbes, Forbes Magazine, 5 Feb. 2020, 

www.forbes.com/sites/zackfriedman/2020/02/03/student-loan-debt-statistics/?sh=15375a 20281f

Heymann, Jody, et al. “Contagion Nation: A Comparison of Paid Sick Day Policies in 22 Countries .” Cepr.net, May 2005, 

cepr.net/documents/publications/paid-sick-days-2009-05.pdf

JCUSH. Cdc.gov, 2003, www.cdc.gov/nchs/data/nhis/jcush_analyticalreport.pdf. “The Labour Market in Canada and the United States since the Last Recession.” Government of Canada, Statistics Canada, 27 Nov. 2015, 

www150.statcan.gc.ca/n1/pub/11-626-x/11-626-x2014036-eng.html

OECD Statistics, 2020, stats.oecd.org/. 

Panelist, Consensus Economics. “Canada and the US: Income and Income Inequality – A Tale of

Lookman 12 

Two Countries.” Consensus Economics, 2 Nov. 2018, 

www.consensuseconomics.com/canada-and-us-income-inequality107/

“Tuition Fees for Degree Programs.” Government of Canada, Statistics Canada, Government of Canada, Statistics Canada, 4 Sept. 2019, 

www150.statcan.gc.ca/n1/pub/71-607-x/71-607-x2019011-eng.htm

Wolfson, Michael C., and Brian B. Murphy. “New Views on Inequality Trends in Canada and The United States.” SSRN Electronic Journal, 1999, doi:10.2139/ssrn.134688. “World Inequality Report.” Wid.world, 2018, 

wir2018.wid.world/files/download/wir2018-full-report-english.pdf.

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Is Income Inequality Greater In US Or Canada?