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 future

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.

Figure 1
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

Figure 2
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.

Figure 3
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 families.

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 ($1,398) respectively.

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 ago.

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 vulnerable position.

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- income families.⁵

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.

Endnotes

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