by Clarence Lochhead and Vivian Shalla
The labour market tends to be viewed as the place where
individuals and families are able to gain economic security, provide for their basic
needs and improve their overall standard of living. It is popular wisdom that the best
form of social security is a job. The state of the economy today, however, raises
serious questions about the labour market s ability to deliver the goods.
The past two decades have seen a massive and unprecedented transformation and
restructuring of economic activities worldwide. In Canada, polarization of the labour
market, an increase in non-standard and precarious jobs, and chronically high levels of
unemployment and poverty are among the more invidious features of the emerging
new economy. Our social security and income tax systems are also being modified in
keeping with the prevailing economic and ideological thinking which emphasizes
individual rather than collective responsibility for the well-being of citizens.
In the wake of these changes, Canadians have been feeling a growing sense of
insecurity and vulnerability. Perhaps the most vulnerable of all are children. Child
poverty rates have remained high over the past decade, with rapid increases in the early
1990s.1 Now there is concern that middle-class families, once considered the
defining element of a stable and prosperous society, are quickly losing ground.2 A
downward spiralling of the middle class would place more and more families in a
precarious position, leaving an ever increasing number of children with a less certain
Are middle- and lower-middle-income families really losing ground in the labour
market? To answer this question, we compared the incomes of families with children
under 18 years of age in 1984 and 1993. Our research showed that the labour market
today is producing greater inequality among families with children than it did a decade
ago, with especially severe income losses among lower-middle-income earners and the
poor. As a result, government income security programs such as social assistance and
unemployment insurance face a far greater challenge than they did in the past.
Government income transfers have only partially offset the rising inequality left by the
labour market. For the poorest families, transfers have compensated for their declining
share of market income, though the result is still very low incomes. For middle- and
lower-middle-income families, transfers remain a critical source of income support, but
they have not been sufficient to compensate for declines in earnings. Moreover,
increases in personal income taxes have meant that the average after-tax income of a
middle- and lower-middle-income family is roughly $1,400 less than that of a similar
family 10 years ago.
The market income quintile ladder
One way of understanding changes in the distribution of income is through
the concept of income quintiles. Imagine lining up all the families in Canada, beginning
with those having the lowest market incomes and ending with those having the highest
market incomes. (Market income refers to income primarily from earnings, but
includes investment income and private pensions.) You then divide the line into five
groups, each with the same number of families. Each of the five groups is referred to
in statistical language as a market income quintile. At one end of the line is the quintile
containing the 20 per cent of families with the lowest incomes. The quintile at the other
end contains the 20 per cent of families with the highest incomes.
A useful way to visualize quintiles is in terms of a ladder with five rungs (see Figure
1). At the bottom of the ladder in the bottom quintile are the poorest families. At the
top of the ladder are the richest families. In Figure 1, each rung on the ladder
represents the upper-income limit for each quintile in 1993. For example, the poorest
20 per cent of families with children under 18 years of age had market incomes of
$16,494 or less./
In our analysis, we refer to the second quintile as lower-middle-income families (with
market incomes between $16,495 and $35,151 in 1993) and to the middle quintile as
middle-income families (with market incomes between $35,152 and $51,685 in
1993). Together, these quintiles are referred to as modest-income families.
Increasing inequality in the labour market
Between 1984 and 1993, the average market income among families with children
remained essentially unchanged. In constant inflation-adjusted dollars, average income
was $47,663 in 1984, and inched up only slightly to $47,777 in 1993. A closer look at
the data reveals, however, that the overall average conceals wide variations between
different segments of the population and thus hides growing market inequality (see
Figure 2). Overall, the average income of the three lowest quintiles has declined, while
that of the two highest quintiles has increased.
Families in the poorest quintile had an average market income of $7,817 in 1984. A
decade later, families in the poorest quintile brought home an average income of just
$5,325, representing a shocking decline of 31.9 per cent. This loss is in stark contrast
to families in the top quintile, whose average market income increased by 5.2 per cent
during the same period (from $97,733 to $102,792). The fourth quintile also
experienced a significant increase in average income (3.6 per cent). Growing
polarization of the job market has negatively affected modest-income families as well.
Between 1984 and 1993, average income declined from $29,276 to $26,291 for
families in the lower-middle-income group, and from $44,247 to $43,103 for families
in the middle-income group.
This shifting of market-generated wealth to the 40 per cent richest families in society is
significant. If the bottom 60 per cent of families had maintained their 1984 share of
income, they collectively would have had access to an additional $5.2 billion in 1993.
This amount is equivalent to 130,000 full-time jobs paying $40,000 per year.
Increasing inequality is also reflected in the changing shares of income derived from
the market. In 1984, as illustrated in Figure 3, the two upper quintiles accounted for
65.8 per cent of all market income, a much larger share than the bottom three quintiles
(34.2 per cent). In 1993, the bottom 60 per cent of families were only getting 31.3 per
cent of total income. In other words, between 1984 and 1993, the bottom 60 per cent
of families lost almost 3 per cent of total market income to the top 40 per cent of
It should also be noted that if the distribution of 1984 market income shares had been
maintained, each family in the three lowest quintiles would have had, on average,
between $1,195 and $3,107 more income in 1993 than it actually did. On the other
hand, each family in the two highest quintiles would have had, on average, between
$2,148 and $4,777 less income in 1993.
Over the past decade, the labour market has produced greater polarization of incomes
among families with children. This means that the distributive role of the labour market
is changing: inequality is becoming more severe. These changing patterns merely
confirm what many families are already well aware of: the labour market is raising the
level of insecurity of a growing number of people. An increasing proportion of middle-
class families with children are being swept into the pattern of decline.
Government transfer payments and market income inequality
The social security system, which was developed to address shortcomings in the labour
market, has been a source of income for millions of families throughout the country at
some point in their lives. But how well does the income security system redistribute
income and reduce inequality generated by the market?
Families at all income levels clearly derive benefits from the income security system,
as shown in Table 1.
In 1984 and 1993, families in all quintiles, though most notably
those in the three lowest quintiles, experienced an increase in their average income
when government transfers entered the equation. (For families with children,
government income transfers consist mainly of social assistance, unemployment
insurance, child benefits and provincial and federal tax credits.) Not surprisingly, the
poorest quintile received by far the largest amount in government transfer payments,
whereas the richest quintile received the smallest amount.
As a result of transfers, the average total income (including market income and
government transfers) of the lowest quintile actually increased between 1984 and 1993,
more than offsetting the losses garnered in the labour market. In 1993, average total
income for families in the bottom quintile was 6.7 per cent or $1,131 higher than in
1984. For earners in the two highest quintiles, average transfers remained fairly stable.
Their higher average total income in 1993 reflects significant labour market gains.
The changing income situation of the second and third quintiles is disturbing. Even
though they received more transfer income in 1993 than in 1984, families in the
middle- and lower-middle-income categories had lower average incomes after transfers
in 1993 than in 1984. Between 1984 and 1993, the average total income of the second
and third quintiles declined by 3.6 per cent ($1,241) and 0.9 per cent ($424)
respectively. Clearly, government transfer payments have not been able to offset the
dwindling market incomes of modest-income families.
While the income transfer system continues to provide critical support to all families by
supplementing market incomes, government transfers are having more trouble filling in
where the market fails for modest-income families. And with the current cutbacks and
further targeting of programs, the future ability of transfers to compensate for declines
in market income is very doubtful. Families in the lowest income quintile would
certainly suffer the most from reductions in government transfer payments, given that
their average market income is near or below poverty levels. But such reductions would
also have a significant impact on middle- and lower-middle-income families.
The impact of income tax
In spite of its importance in redistributing income, the income security system is not the
only mechanism that serves to reduce income inequality generated by the labour
market. The progressive nature of the income tax system (in which individuals with
high incomes pay a larger per cent of their income in tax than low-income individuals)
helps to reduce the gap between rich and poor.(3) The progressive impact of income
tax is illustrated in Table 2.
For example, in 1993, families in the poorest quintile paid
an average of $443 in income tax (or 2 per cent of total income), while families in the
richest quintile paid an average of $26,806 (or 26 per cent).
As Canadians are well aware, personal income taxes have increased over the last
decade. Between 1984 and 1993, average income tax increased throughout the entire
income range, with families in the lower quintiles getting the smallest increase and
families in the higher quintiles the biggest. With these changes, the share of after-tax
income increased for families in the two top quintiles, albeit modestly. Likewise, the
share of after-tax income increased for families in the bottom quintile. But middle- and
lower-middle-income families lost ground, as their share of after-tax income decreased
by 0.4 per cent (third quintile) and 0.5 per cent (second quintile) over the same 10-year
period. The biggest drop in after-tax income was not among the richest 40 per cent, but
among the modest- income quintiles. Indeed, the average after-tax income of middle-
and lower-middle-income families declined by 3.6 per cent ($1,466) and 4.5 per cent
The progressive nature of the tax system continues to offset the inequality of market
income. However, due to falling market incomes and increases in personal income tax,
modest-income families today appear to be losing ground relative to those of a decade
The growing insecurity of modest-income families with children
From the mid-1980s to the early 1990s, the labour market produced increasing
inequality among Canadian families with children. Those in the poorest quintile have
suffered tremendously, although government transfers and taxes have played an
important role in countering the negative effects of the market on these families. The
market situation of modest-income earners has also deteriorated during the same
period. While these families benefited from larger transfer payments, this increase was
not sufficient to completely offset losses in the labour market. Furthermore, over time,
taxes have weakened the equalization effect of government transfers for this 40 per cent
of middle- and lower-middle-income families, leaving them in an increasingly
The worsening market income situation of modest-income families is linked to broad
transformations in the global economy, marked by greater international competition as
well as massive technological change. Since the early 1980s, rapid economic and
workplace changes have resulted in an increasingly polarized workforce. The
emergence of a good jobs/bad jobs society has led to the disappearance of a growing
number of jobs in the middle of the wage spectrum.4 The proliferation of non-
standard work arrangements, such part-time work, subcontracting, home work, self-
employment and overtime, has produced a more precarious job market for modest-
Moreover, in this era of relentless downsizing in both the private and public sectors,
unemployment remains persistently high. Modest-income earners are being laid off in
unprecedented numbers from formerly stable jobs . As Susan McDaniel observed,
economic restructuring in Canada has left millions of Canadians who did everything
according to the book obtaining skills, working hard at their jobs, supporting their
families without jobs.6
Clearly, security of income achieved through the labour market is deteriorating. In
addition, reforms and cutbacks to social programs over the past decade have shaken
family security. And yet these programs are expected to offset the negative effects of
shrinking employment opportunities and the tremendous flux in the labour market. If
the conditions of the labour market continue to disintegrate and the system of income
security continues to be eroded, income insecurity and poverty will worsen. Tax cuts
that especially benefit upper-income families will increase the gap between them and
those at the other end of the wage scale. Current schemes to cut transfers and reduce
income taxes will move us closer to the distribution of income based solely on the
labour market, thus exacerbating income inequality.
Insecurity is an increasing concern not only for poor families, but also for
middle- and lower-middle-income families. In their precarious situation, they worry
about being able to afford a decent home, put food on the table and support their
children s higher education. It is ultimately the children who pay the highest price of
increased family insecurity. They face a greater risk of poverty and health problems,
and are left with more instability, fewer opportunities and diminished life chances. The
economic well-being of families affects how children face the future. The outcomes of
one generation are directly connected to the opportunities of the next.
There is an urgent need to address the growing insecurity and precariousness of
families with children. The social security system and the progressive income tax
system represent the major means of redressing the inequality of opportunity in the
labour market. Therefore, transfer payment cutbacks and other changes which would
result in less progressive taxation are not the solution to ensuring overall security for
poor and modest-income families.
The widening income inequality in the labour market is producing a two-tiered society.
Relying on the labour market as the primary source of income security is becoming less
tenable. Enduring faith in the neutral market and private enterprise as the driving forces
behind economic and social well-being is drawing attention away from other, more
equitable and sustainable policy alternatives. The current focus on the income-
generating dimension of the market has eclipsed discussion of its potential role for
distributing income more equitably.
1 National Council of Welfare, Poverty Profile 1993
(Ottawa: Supply and Services, 1995), pp. 7-8.
2 Diane Bellemare, "The History of Economic Insecurity" in
Family Security in Insecure Times, Vol. I, (Ottawa: National
Forum on Family Security, 1993) pp. 57-86; Daphne Bramhan and Gordon
Hamilton, "The Death of the Middle Class," Transition, Vol. 23, No.
1, March 1993, pp.10-11.
3 It should be noted that income tax is significant but not
the sole element of the overall taxation system. This analysis does not
consider the impact of other regressive forms of taxation, such as
4 Lars Osberg, Fred Wien and Jan Grude, Vanishing Jobs:
Canada's Changing Workplaces (Toronto: James Lorimer & Co.,
1995); Economic Council of Canada, Good Jobs, Bad Jobs: Employment in the
Service Economy (Ottawa: Supply and Services, 1990).
5 Grant Schellenberg and Christopher Clark, Temporary
Employment in Canada: Profiles, Patterns and Policy
Considerations (Ottawa: Centre for International Statistics,
Canadian Council on Social Development, 1996); Arthur Donner, Report of the
Advisory Group on Working Time and the Distribution of Work
(Ottawa: Supply and Services, 1994).
6 Susan A. McDaniel, " Where the Contradictions Meet:
Women and Family Security in Canada in the 1990s" in Family Security in
Insecure Times, Vol. I, (Ottawa: National Forum on Family
Security, 1993) p. 166.
Clarence Lochhead is assistant director of the Centre for
International Statistics at the CCSD.
Vivian Shalla is a research and policy associate
with the Centre.
Canadian Council on Social Development,
190 O'Connor Street, Suite 100,
Ottawa, Ontario, K2P 2R3