Equitable Growth in Canada

In the past few decades, inequality has gained focus of researchers and economists for many reasons. First, realizing the importance of equitable growth for economic stability in the 21st century, policymakers are shifting focus from the use of per capita income as a measure of economic growth to income distribution in a country (Berg & Ostry, 2011; Piketty, 2014). Second, there are emerging market forces, particularly globalization and the rise of artificial intelligence, that increase inequality among some of the richest economies in the world (Atkinson, 2015). Finally, policy measures previously considered as effective are becoming increasingly inefficient in reducing inequality – and thus warranting an overhaul of the approaches. Canada is one such global economies that are experiencing increasing inequality. In a recent survey ranking 17 peer economies, Canada scored a “C” and ranked the 12th due to wide income gaps between the top 1%, the middle- and low-class citizens in the country. This paper attempts to create an understanding of the current level of inequality in Canada and its main causes and then proposes measures to solve the problem. Most important, however, is the fact that the economy of Canada requires major structural changes in tax collection and use as well as structural reforms that will increase efficiency in terms of enhancing equitable growth.

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Current Status in Canada

Income is the most widely used measure of economic welfare in countries. Income inequality indicates that the available income in a country is unevenly distributed among citizens. It provides an overview of what a country’s citizenry is composed of, that is the percentage of the rich, the middle class and the lower class. This information is important for understanding how fair the country is in distributing the national wealth. The most important measure of income inequality is the Gini coefficient. Gini coefficient uses perfectly equal distribution as the starting point to shows how income distribution deviates from the ideal and results in unequal distribution of a country’s wealth. Hence, Gini coefficient is a good indication of the efficiency of an economy (The Conference Board of Canada, 2017, para.13).

Apparently, although Canada is one of the richest developed economies in the world, its economy is not efficient (Aptekar, 2013). As indicated in the bar graph below, Canada ranks 12th among 17 peer economies and is much worse in terms of income distribution than other European economies, such as Denmark, Austria, Belgium, Sweden and France.

As indicated above, Canada performs poorly in terms of distribution of the gross domestic product (GDP) among its population. As a result, there is a high concentration of income within the top 1% of its citizens, whereas the middle and lower class of the population have much smaller income (Aptekar, 2013). Research indicates that in the last two decades, Canada has experienced increasing concentration of income among the top 1% at expense of the expanding middle- and lower-class families. As a result, the country has lost economic efficiency, and the situation may aggravate  unless populist policies are developed.

Causes of Inequality in Canada

Uneven distribution of income in Canada can attributed to two major factors. The first factor is market forces, which are described by increasing globalization and skilled-based technical change. The result of such changes is the increasing demand for skilled labor, and this case “highly skilled labor,” resulting in unaccustomed competition with the less educated in the country. It appears that Canada exports more skill-intensive goods and imports less skill-intensive products. This situation contributes to lost opportunities in the low-skill industries and increased opportunities in the high-skill industries. This observation explains why Canada’s population is becoming more unequal, which is an inherent characteristic of contemporary technologically advanced societies, where high value is placed on skilled labor.

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Another way to explain the causes of income inequality in Canada is analyzing institutional forces. As long as the rate of unionization continues to decline, deregulation of the business sector increases, national policies in favor of the rich are undertaken, and minimum wage remains stagnant, it is unlikely that inequality in Canada will reduce. In an article, The Rise of Canada’s Richest 1%, Armine Yalnizyan (2010) argues that a fall in the top marginal tax rates could be used to explain the rise in the top richest 1% in Canada. The following section will examine, among other factors, the role of marginal tax in increasing inequality and how the issue can be solved in future. Moreover, it is clear that the causes of increasing inequality among Canadians are the same for peer economies (Aptekar, 2013; Statistics Canada, 2013).

Proposed Policy Measures

Policy measures that are drawn directly from an understanding of the background of income inequality are effective in solving the problem. Therefore, the measures proposed in this section draw from an understanding of Canada’s current position in terms of inequality and key inequality drivers in the economy. The proposed policy measures can be broadly categorized into those that target market forces and those that target institutional forces of inequality discussed in the foregoing section.

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Increased Spending on Welfare Programs

Real economic development is attainable when the entire economy is activated. As a preliminary, the government of Canada will need to focus on the welfare of the majority, namely the poor and the middle class, by increasing spending on welfare programs. In this pursuit, the government will both raise the living standards of the poor and reduce inequality between the nation’s top social class and the rest of the citizenry. First, the government needs to improve government transfers and tax collection. In particular, the government will need to raise personal income rates in order to tax the rich more and use the tax thereafter to fund welfare programs for the nation’s poor. The taxes and government transfers should be directed towards child benefit schemes, unemployment insurance, and social assistance programs that will reduce the gap between social classes (The Conference Board of Canada, 2017). Research proves that government taxes and transfers help to reduce inequality. A simple illustration for this fact is a bar graph showing Gini coefficients before and after adjusting income taxes and government transfers in the peer countries from the previous section:

gini-coefficient-before-and-after-taxes-and-transfers-late-2000s

It is clear from the graph that Gini coefficient for each country decreases when adjustment for transfers and income taxes are made. Thus, it indicates that by expanding welfare expenditure, the government of Canada will reduce the gap between different social classes (Mahutga & Jorgenson, 2014). In addition, the country is likely to realize other benefits, such as reduced crime rates too.

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Reintroduction of Progressive Income Tax System

Atkinson (2015) rightfully observes that progressive income tax system, which aimed at taxing the rich more and the poor less, was effective in reducing the gap between social classes (p.14). However, since this system was replaced with the current redistributive policy in OECD countries, particularly in Canada, there has been lack of proper distribution of income with dire consequences. Atkinson (2015) claims that the inefficiency of the current redistributive system is the cause of the widening gap between incomes of households in many countries. Therefore, the government of Canada should primarily consider reintroducing the once-effective progressive income tax system. Through this system, the government will generate more taxes from the super rich, use them to fund programs for the poor and thus reduce the gap between the intellectuals and low-skilled workers.

Raising Minimum Wage Limit

Minimum wage is currently on focus among the developed countries. There is a concern that the modern capitalism thwarts provision of reasonable standards of living for the working class (Lerner, 2014). The reason for this is because the minimum wage limit is very low to enable the working class meet their needs sufficiently while saving their income. Lack of savings, in turn, reduces their ability to invest and thus increases the gap between them and the capitalist class. Therefore, the government of Canada should bring this factor into public discussion in order to unleash the potential of the overwhelming middle-class to change the economy. This way, the country will increase circulation of money in the economy, improve investment, create employment opportunities and thus reduce inequality among the population (Mahutga & Jorgenson, 2016)

Conclusion

In summary, inequality is may culminate in a populist revolt. Therefore, the government of Canada must take measures to mitigate it. Forces of globalization are continually putting pressure on the country to import less skill-intensive products at the expense of the majority of employees working in low-skill industries. However, the country can mitigate this scenario by adopting a progressive tax system to compensate the lost opportunities for the low-skilled worker. Similarly, the rise of artificial intelligence is giving undue advantage to the technically advanced workers. This gap can be reduced by funding programs for the poor, making them meet the same skill level. If the suggested policies are duly implemented, Canada will be on its way to attaining equitable growth.

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