Margaret Wente and Inequality

I highly recommend a new StatsCan (Andrew Heisz) study of income inequality and redistribution – with one significant quibble.

Heisz confirms a great deal of what we know – family after tax income inequality has been growing apace in the 1990s, driven above all by increased inequality of market income. http://www.statcan.ca/english/research/11F0019MIE/11F0019MIE2007298.pdf

This is a methodologically sophisticated study. It confirms the main story line of Armine Yalinizyan’s recent update on the growing gap for the CCPA inequality project (itself based on more or less the same data base) but adds to it by standardizing the family income data for family size (giving us an important piece of methodological defence against the rampant inequality deniers) and also giving us several useful statistical measures of inequality and polarization.

One of Heisz’s key findings is important – it is the growth of market income inequality which explains growing after tax family income inequality, not a major reduction in the offsetting role of the tax/transfer system.

My quibble is this. Heisz tosses out the (unsubstantiated) thought (p9) that growing market income inequality is not explained by rising individual earnings inequality, but rather by changed family earnings patterns. He has picked up on the “homogamy” thesis – that there are many more high paid highly-educated women out there, and that they are mainly living with high-paid men, compounding the inequality effect of the individual earnings distribution. This was the theme picked up by Margaret Wente in today’s Globe. Conservatives are fine with this argument since it puts progressives on the defensive – after all we don’t want to worry about high paid women or consider taxing family rather than individual incomes (which we don’t want to do on gender equity grounds.) Homogamy has the implication that inequality is at least partly beyond our control.

My take is that “homogamy” does indeed play a role as suggested by earlier StatsCan work. However, the tax data for INDIVIDUALS clearly show a surge in top tail driven income inequality as the top 1% or so have disproportionately benefited from economic growth. This has been closely documented for Canada by Saez and Veall to 2000 (see their working paper at http://papers.nber.org/papers/W9607
My quick take on the most recent tax data is that the trend continues very strongly in that direction- the income share of those making more than $100,000 and especially more than $250,000 – the top one half of one percent or so – is rising fast. (Preliminary 2004 tax data show that the top one half of one percent making more than $250k now “earn” about 10% of all income, even more if you adjust for the untaxed portion of capital gains.)
As a further quibble, many statistical measures tend to under-state top tail driven inequality. The Gini mainly captures what is happening at the middle rather than at the extremes, and the often-used p90/p10 ratio – the minimum distance between the top and bottom 10% – doesn’t capture what is happening in the top 10%.

But count on Peggy to grab an aside in a relatively obscure StatsCan study to put us off on the wrong trail!