Lecture 5: Social Class & Economic Inequality PDF

Lecture 5: Social Class & Economic Inequality SOC100: Intro to Sociology Dr. Mitch McIvor  House Keeping Midterm is NEXT week during lecture time (6:10– 8 pm) Everything from lectures 1-5 and textbook chapters 1-4 are testable....

Lecture 5: Social Class & Economic Inequality SOC100: Intro to Sociology Dr. Mitch McIvor  House Keeping Midterm is NEXT week during lecture time (6:10– 8 pm) Everything from lectures 1-5 and textbook chapters 1-4 are testable. This lecture is on the test. There will be 10 questions from this week’s textbook and lecture on the test The midterm is worth 20% The midterm consists of 50 multiple choice questions and true/false questions We will NOT test specific dates or statistics Tutorial-specific content is not on the test UNLESS it is also covered in the textbook and/or lecture What to bring? Student ID or government photo ID (you NEED to know your student #) Pencil(s) and eraser(s) Hard copy of an English to other language dictionary; English-only dictionaries are NOT allowed. 2 Contoso S u i t e s  House Keeping Where do I take the midterm? Alphabetical by last name: Room Last Name EX100 Abalos to Huang EX200 Huidor to Ryu EX310 Sabijon to Vanderstraeten EX320 Vandusen to Yu HA401 Yuan to Zuwirai * EX stands for Exam Centre (255 McCaul St) * HA stands for the Haultain Building (170 College St., rear) 3 Contoso S u i t e s ECONOMIC INEQUALITY Contoso 4 S u i t e s  Part A: Understanding Income Inequality & The Matthew Effect Contoso 5 S u i t e s What is economic inequality? Economic inequality= “disparity in the distribution of income between individuals, groups, populations, social classes, or countries” (Britannica, 2024). Essentially, when we study economic inequality, we study who is rich and who is poor, and we determine how to accurately measure the inequality or difference between these two categories. How would you determine if someone is rich or poor? The first thing people think when they consider economic inequality is how much income someone makes. Contoso 6 S u i t e s What is economic inequality? The first step in studying any concept, and an essential step for being able to compare something over time or between regions (such as Provinces or Countries) is deciding how to measure the thing in question, which right now is income. We call the process of determining how to measure something “Operationalizing” it. the formal definition of operationalize is “the process of turning abstract concepts into measurable observations” (Bhandari, 2023). It is important to operationalize concepts to ensure everyone is on the same page and because most concepts are more complicated than they appear. For example: Think of flight as the concept Then flight as an operationalized idea. Contoso 7 S u i t e s What is economic inequality? Two Questions we want to answer to understand income better: How do we measure income and who is rich or poor? How do we compare today to the past when it comes to socio-economic status? Contoso 8 S u i t e s  When assessing income over time we first need to adjust for inflation. You have probably heard a grandparent saying Inflation: something like “back in my day a soda cost a nickle! And seeing a movie was only 50 cents!” Well, that’s true, and that’s what inflation adjusts for, i.e. it adjusts for how expensive things are and, thus, makes historical comparisons possible In Canada for example, Statistics Canada prepares the Consumer Price Index to measure inflation each month. It sets inflation based on the price of a ‘typical basket of goods’. This basket includes the average cost of (1) food and shelter, (2) household operations, (3) furnishings and equipment, (4) clothing and footwear, (5) transportation, (6) health and personal care,(7) recreation/education /reading, as well as (8) Alcohol/Tobacco/Cannabis (Statistics Canada, 2024). Contoso 9 S u i t e s  Inflation: Here is the Consumer Price Index (CPI) graphed from 1915 to 2022. Consumer Price Index This graph is set to 2002 dollars. So in 2002, one (i.e., Inflation) dollar was worth 1 dollar. 160 140 120 If we look at 1915, however, we see that one 100 dollar in 2002 was worth only 6 cents in 1915 80 ($0.06). So something that cost a dollar in 2002, 60 would have cost only 6 cents in 1915. 40 20 0 On the other end, the CPI in 2023 was 157. In other words, something that cost $1 in 2002, now 1922 1934 1946 1958 1970 1982 1994 2006 2018 1914 1918 1926 1930 1938 1942 1950 1954 1962 1966 1974 1978 1986 1990 1998 2002 2010 2014 2022 Source: Statistics Canada, 2023 costs someone $1.57. Contoso 10 S u i t e s  Inflation: Why is it important to adjust for inflation? If we just looked at say average income over time, it will lead us to believe that incomes have increased a lot. The graph to the left shows what average income since 1976 looks like when it is not adjusted for inflation. In 1976 the average Canadian made $14,119 per year in employment income. In 2021, the average Canadian earned $81,703 in income. So, we can stop there and conclude that Canada’s doing great, right? At least in the sense that everyone is making significantly more money than Source: Statistics Canada, 2024 in the past. Contoso 11 S u i t e s  No, because we need to adjust for inflation as Inflation: incomes have to rise just to keep pace with inflation (because a dollar today is not worth as much as it was in the past). We actually use the Consumer Price Index to adjust for inflation, we do this by choosing a year (here Statistics Canada chose 2011) to serve as the reference. Let’s add average income over time in 2011 constant dollars (in other words, after adjusting for inflation). The Inflation adjusted line is in orange. It tells us that the average household income in 1976 was $45,400 and in 2021 it was $57,700 Thus, instead of concluding that incomes rose $67,584 (from $14,119 to $81,703) based on Source: Statistics Canada, 2024 income before adjusting for inflation. We now Inflation, however, is not the only thing know that it actually increased $12,300 (From we must consider. $45,400 to $57,700). Contoso 12 S u i t e s  Once we adjust for inflation, we need to determine how to measure what is typical Measuring/ or normal, and there are two types of typical income measures: Operationalizing 1) Average income: Income Add up all scores and divide by the total number of scores. For example, an exam average. But all of us that study income (economist, sociologists, etc.) agree that it is NOT the best measure of income and often isn’t even a good one for telling us what is typical for the majority of people. The problem with the average is that it is highly influenced by very high scores. Instead, we prefer… Contoso 13 S u i t e s  In terms of how we determine what is average or normal there are two types of income measures: Measuring/ 2) Median income: Operationalizing The median is calculated by ranking all the scores Income from highest to lowest and reporting the middle number (so if there was 7 cases you would rank them and report case #4). Easy to remember, think of a street median. Contoso 14 S u i t e s  Imagine I took a small group from this class. Say it was Example of why 5 people and I want to determine what their usual/typical/normal income is. Their incomes are: this matters: Person1 $33,000 Person2 $36,000 Person3 $39,000 Person4 $42,000 Person5 $5,000,000 1) Average income: I could report the average and say that the average income for the group was $1,030,000! What a wildly successful group! (not a very accurate picture though is it?) 2) Median income: The median income here would be the middle number or $39,000. This is more accurate of what is typical for this group. Only the person making 5 million is not well represented by it. Median income is often preferred as the measure of what is typical because really rich people like Bill Gates and Jeff Bezos who make millions upon millions a year pull the average up and everyone seems much richer than they actually are. Contoso 15 S u i t e s  Median & Average Household Income in Canada The average income in Canada rose from roughly $45,400 in 1976 to $57,700 in 2021 (+$12,300) between 1976 and 2021. So you might look at this and think “Go Canada!”, we’re doing great! Median income, however, only rose from $37,600 to $39,700 during the same period (+$2,100). This tells you that the typical income actually barely rose at all. Note the difference in the 2021 average income of $57,700 and median income of $39,700. If we’re talking about the typical household’s Source: Statistics Canada, 2024 income that is a $18,000 difference! When choosing the median or average to report, what story someone wants to tell is often a deciding factor. For example, if a media outlet or politician wants to emphasize how well the region is doing, they will report the average income even though the median is more accurate. This is really important to know as you move forward in life because the average income is usually Contoso 16 reported more and it often tells an inaccurate story. S u i t e s  Types of Income Further, we also need to distinguish between different types of income. 1) Active Income Income gained by exchanging time for money usually through a paid job or self-employment (US News, 2024) 2) Passive Income Passive income refers to income that is not tied to active labour. In other words, income you do not exchange time for and may actually require no time at all—hence the name “passive” (ibid). This typically takes the form of investing money in the stock market, real estate market (example: Landlord), in other businesses, etc. Contoso 17 S u i t e s  Passive Income & The Stock Market How does the stock market work? Overall, it is pretty simple. Company’s raise money they need to grow their business by selling parts or “shares” of the company in the stock market. These are what stocks are, shares of ownership in a company (Wealth Simple, 2024). People decide what companies to buy shares in and then the value of the share goes up and down depending on the company’s value and reputation (i.e. people’s willingness to buy the shares you own; in the same way that the value of anything you own, a house for example, depends on how much someone is willing to pay for it). Contoso 18 S u i t e s  Passive Income & The Stock Market It is not just companies that people buy shares into. They also can buy shares of commodities (ex: gold and silver), real estate, and bonds. Bonds are just a fancy economics way of saying a loan, buying a bond is basically giving a loan to a company or business that agrees to pay you interest over a set period of time in the same way you pay interest on a car or mortgage or just a credit card balance (Forbes, 2024). Contoso 19 S u i t e s  Passive Income & The Stock Market Why do you need to know about stock markets, bonds, etc.? Two reasons: 1. You need to know this for life. Most people when they invest in stocks do so through a bank or other financial institution (i.e. you don’t need to be an expert), but we all participate in the stock market usually through our retirement plans and should know the basics of how it works. It is likely that you and your employer will pay in to a retirement plan that you will rely on once you retire. Chances are that money will be invested in the stock market and so it is important you know at least the basics of it (if you don’t know anything about it then it can seem very technical and scary when in reality the basic principles are easy to understand). Contoso 20 S u i t e s  Passive Income & The Stock Market Why did I make you learn about this? The second reason is: 2. When people think of income inequality, they usually think of active or employment income and do not realize that the main way the rich stay rich is through passive income or, in other words, money they do not actually work for. Let’s look at an example. This is what made Marx so angry that he called for a worker revolution. Contoso 21 S u i t e s  Where are you at? Individual Activity ▪ Before we go over an example, answer the following question. This is not for points, it’s for your own use. 1) What do you think the percent chance of you becoming a millionaire one day are? (think owning a house, pension, value of all possessions, everything) Score=0/100 Score= 50/100 Score=100/100 Not going to A 50 % chance I’m 100% confident I will happen have a million dollars one day  An Example of Passive Income: How the Rich Stay Rich Bill Gates has 3 children, the oldest is Let’s compare Jennifer to you. Jennifer Gates, who is 28. This is a private experiment, keep track on a paper if you want for your record only. Contoso 23 S u i t e s  An Example of Passive Income: How the Rich Stay Rich JENNIFER GATES YOU (I’ll use myself) Let’s pretend that as a graduation gift As a graduation or other gift your parents Jennifer is given $5 million from her father to gave you _____________. provide her financial security. He gives it to Mine gave me $100. her under the condition that she invests it in the stock market and doesn’t spend it. Your total money in the bank when you Jennifer’s bank account immediately reads went to college was _____________. $5 million because in the US you don’t pay Mine was roughly $5,000 tax as a recipient of a financial gift under 11.4 million (IRS, 2024). She invests it in the stock market for which the average return over the last 20 years has been 6% (Investopedia, 2024). Contoso 24 S u i t e s  An Example of Passive Income: How the Rich Stay Rich JENNIFER GATES YOU (I’ll use myself) INCOME IN COLLEGE: INCOME IN COLLEGE: Imagine that Jennifer doesn’t work in college, her parents I worked at dairy queen and a grocery store in college. pay her essentials like tuition (she went to Stanford) as well I worked 30 hours per week, the minimum wage was as accommodations, cell-phone, etc. $6 back then. Thus, I earned roughly $720 a month before taxes. She does earn passive income though through her investments. A 6% annual return on a $5 million investment How about you, do you work and what is your is roughly $300,000 per year (for context remember earlier monthly income: ____________ (now multiply by 12). that the average Canadian’s income in 2021 was $57,700 a Now take your monthly essential expenses (tuition, year). housing, food, etc.): __________ (now multiply by 12). In other words, her monthly expenses are whatever she spends on non-essentials and her monthly income is Look at your prior two answers and guess what your $25,000 (i.e. 300,000/12 months) despite not having a job. change in finances is per year: ______________? Let’s say Jennifer is responsible and saves her passive I earned roughly $8,640 a year at my 30 hour/week income. Her annual change in finances in that case is job and between tuition, housing, and food my +$300,000 a year expenses were around $20,000. Thus, my annual change in finances was roughly Contoso -$10,000 a year that I borrowed in student S u i loans. 25 t e s  An Example of Passive Income: How the Rich Stay Rich JENNIFER GATES YOU (I’ll use myself) At the End of COLLEGE, when life begins: At the End of COLLEGE, when life begins: When she graduates college, Jennifer is 1.2 million When you graduate college what would you say your bank dollars richer than when she went in (i.e. 4 years of account will read? _____________ (times number from earning $300k a year in the stock market). Her last slide by 4-5 years). parents paying her expenses also means she is debt free, and her bank account now has $6.2 million When I graduated, I owed $40,000 in student loans. So not dollars in it. only do I have less money, but I actually had to pay back money. Thus, with my first job I start paying back my loan and my income was reduced by a $300 student loan payment ($75 of which is actually just interest payment). Now keep in mind this difference is just financial. Jennifer has $1.2 million dollars and can legitimately claim that she already “EARNED” herself over a million from what her father gave her, quite impressive for a new college graduate! You on the other hand will have ______ at graduation (I had -$40,000, which reduces my monthly income due to monthly debt payments). Contoso 26 S u i t e s  An Example of Passive Income: How the Rich Stay Rich Let’s not forget the social cost here too. When you graduate you will have been a full-time student and have probably worked (I had worked 30 hours a week). This takes a toll in terms of stress, energy levels, and overall well-being when starting our careers not to mention just general life satisfaction. Consider the concept of allostatic load: “the cumulative burden of chronic stress and live events” (Guidie at al, 2021), which has found that stress builds over time and weakens a person’s physical and mental health in lasting ways. You can think of it like a bridge wearing down over time and being able to handle less and less weight as a result. JENNIFER GATES YOU (I’ll use myself) Contoso 27 S u i t e s  An Example of Passive Income: How the Rich Stay Rich JENNIFER GATES YOU (I’ll use myself) This example is an illustration. It is not exactly real as I do not know how much money Bill Gate’s has given Jennifer. I can tell you, however, that in real life Jennifer graduated medical school in May 2024. Yet despite this, her net worth is 20 million dollars. She also lives in a 51 million dollar home in New York. This is an example of passive income and how the rich stay rich. This process is referred to as The Matthew Effect (Merton, 1968, Simon, 1957). It has nothing to do with active/job income, which is what most of us think of when we think of income and the wealthy. In our example, Jennifer made 1.2 million off of stock market returns per year without doing anything at all. Contoso 28 S u i t e s ▪ The Matthew effect: advantage accumulates in ways that allow the rich to get richer. ▪ For example, when one comes from advantage, they do The Matthew not need to take loans and pay interest. They can Effect instead invest their money to earn more. It is much easier to make money when you have money—for example, stock market, investing in property, and starting businesses. For example, Bill gate’s Son Rory also has a net worth of 20 million (he’s 25). In 2020, Forbes declared Kylie Jenner the youngest self-made billionaire in the world (she was 22 at the time). Kylie made 7.5-8.3 million per season of keeping up with the Kardashians. She was only 9 years old when the show began yet she is considered a “self-made” millionaire by Forbes. Contoso 29 S u i t e s ▪ The Matthew effect: advantage accumulates in ways that allow the rich to get richer. The Matthew ▪ What was your answer for the likelihood that you become a millionaire in your lifetime? Effect ▪ The percent of average Americans (we don’t have Canadian data for this) that are born to poor parents (parents in the lowest income quintile) that become millionaires is less than 0.8% (Hertz, 2006). 99.2% of this group never get there. ▪ On the other hand, 98% of the children of multi- millionaire parents become millionaires themselves through inheritance (US Federal Reserve, Survey of Consumer Finances 2019). ▪ “People get what they deserve or earn” is a common phrase. Think about those differences in odds though, 0.8% versus 98%, how much is this related to effort? Contoso 30 S u i t e s ▪ 54% of millennials thought they would be millionaires in their lifetime (CNBC, 2019). Again, the real number of people that do so in the US before turning 40 is 2% The Matthew (Business Insider, 2024). Effect ▪ On the bright side, the percent of those over 40 years of age that have a million in pension, home ownership, savings and stocks in America within their lifetime is 14% (Forbes, 2023; Statista, 2023). This means that there is still an 86% chance that the typical person never gets there but at least the odds are better!). Contoso 31 S u i t e s ▪ Also, in case you were wondering what the percent of Canadians that earn a million or more The Matthew per year in income is, the answer is 0.1% and that includes the people born rich (Spring Financial, 2023). Effect ▪ So your odds of never getting to earn a million a year are roughly 99.9%. Contoso 32 S u i t e s ▪ But hey, there is always the lottery right! The Matthew Effect ▪ FYI, the odds of winning the lottery in Canada is roughly one in 300 million, in percent form that’s: 0.000000003% (NBC, 2024) Contoso 33 S u i t e s  Taxing the wealthy This is a breakdown of how much the average person in the highest tax bracket (those who earn the most in the country) pay in tax a year. ▪ Note that among wealthy countries ,Canada ranks 20th and just below the average tax rate for OECD countries. The average millionaire in Canada will pay 55% of their income in tax compared to say Sweden, where the tax is 76% tax for those earning the most income. Source: Lundberg et al, 2019 Contoso 34 S u i t e s  Taxing the wealthy 55% is a lot but consider an example... David Thomson (Thomson Corporation Owner) makes 1.2 million dollars per year according to Forbes (2019). In Canada, he pays 55% tax which means he pays $660,000 per year. In Sweden he would instead pay $912,000 a year. In France, he would pay $828,000. And so on. Contoso Source: Lundberg et al, 2019 S u i t e s 35  Odds of being a Odds of ever being a Group millionaire in lifetime millionaire by 40 Tax as Regular People Those born to 0.8% 98% 14% ---- a force for Millionaire parents equality ▪ To summarize ▪ Most of us (currently, 86%) will never be a millionaire in our lifetimes. ▪ The vast majority of the income earned by the very wealthy is made through passive income like the stock market (for example, if you have a million dollars to invest in the stock market you will earn on average $60,000 per year just in returns from stock. This is more than the average income in Canada in 2021, and it requires little to no work. It is passive income. Contoso 36 S u i t e s ▪ Income has a complicated status in terms of how fair it is. ▪ Unlike gender, race, sexuality, and other ascribed statuses Tax as where we have no control over our status, when it comes to income most people do have an ability to affect income (at a force for least once they are working age), which makes it an achieved status in the eyes of many. equality ▪ Yet, the family we are born into has significant effects on how Ascribed Status= Attributes well we do economically, which suggests strongly that income and wealth are not just determined by one’s effort but also by (advantages and disadvantages) factors outside of one’s control (like family wealth). assigned at birth. ▪ This is the justification for progressive taxation (i.e. increasing Achieved Status= Attributes the amount of tax paid the higher one’s income is). In this way, (advantages and disadvantages) taxes act as a form of re-distributing wealth and promoting developed throughout life as a equality. In a sense, it tries to undo some of the advantages the result of effort and skill. wealthy have, and the disadvantages the non-wealthy face (for example, using taxes to provide free healthcare and education). Contoso 37 S u i t e s 5-Minute Break Contoso 38 S u i t e s  Part B: How Inequality has changed in Canada since 1980 & Why How do you think inequality has changed since roughly 1980? Is it better now, worse now, the same? Contoso 39 S u i t e s ▪ So now that we understand income better as a concept and one of the rationales for taxes, let’s ask two questions. Changes in 1. How has inequality in Canada changed over the last few decades? Canadian 2. Has progressive taxation been doing a good job of keeping inequality in check? Inequality Over Time Source: Statistics Canada, 2024 ▪ Let’s start with our earlier graph of average and median income over time. What does Contoso the average getting higher than the median over time tell us? S u i t e s 40  When we use average or median income as a whole, we are unable to distinguish how income changed for Changes in different groups of people. Canadian One way to determine how income changed over time for people at different levels of socio-economic status Inequality is to use what we call Income Quintiles. Over Time Quintiles divide the population into 5 groups: 5) Top 20% of Earners (80-100% group) 4) Above Average 20% (60-80% group) 3) Middle or Average 20% (40-60% group) 2) Below Average 20% (20-40% group) 1) Bottom 20% of Earners (0-20% group) This allows us to see how income changed for the top, bottom, and middle percent of earners. Contoso 41 S u i t e s  The way we make quintiles, is just to order everyone in the group from highest to lowest (as we did with Changes in median), then dividing them into the appropriate quintile group. For example, imagine 10 people’s Canadian incomes ranked: Inequality $30,000 Bottom 20% of Earners (0-20% group) $36,000 Over Time $40,000 Or Q1 (Lowest Class) Below Average 20% (20-40% group) $44,000 Or Q2 (Lower-Middle Class) $48,000 Middle or Average 20% (40-60% group) $49,000 Or Q3 (Middle Class) $51,000 Above Average 20% (60-80% group) $56,000 Or Q4 (Upper-Middle Class) $68,000 Top 20% of Earners (80-100% group) $89,000 Or Q5 (Upper Class) Contoso 42 S u i t e s  Changes in When we break down changes in income over time by Canadian quintile, we see a very clear pattern: Inequality Over Q1/Lowest Quintile: 1976 Income: $7,100 Q2: Below Average Quintile 1976 Income: $22,000 Time 2011 Income: $7,700 2011 Income: $23,200 Difference: +$600 Difference: +$1,200 Q3: Average Quintile Q4: Above Average Quintile 1976 Income: $32,400 1976 Income: $44,400 2011 Income: $38,500 2011 Income: $57,100 Difference: +$6,100 Difference: +$13,100 Q5: Top Quintile 1976 Income: $75,800 2011 Income: $108,400 Source: Statistics Canada, 2022 Difference: +$32,600 Contoso 43 S u i t e s  Changes in Quintile Income Gains between 1976-2011 Bottom 20% of Earners Below Average 20% $600 $1,200 Canadian Middle or Average Earner $6,100 Inequality Over Time Above Average 20% $13,300 Top 20% of Earners $32,600 ▪ When looking at Canadian income changes since 1976 by quintile, we very clearly see that there has been very little income gained at the bottom half of the income distribution, and almost all of the growth has occurred at the very top. ▪ Indeed, the top 20% of earners gain 54.3 times as much income at the bottom earners, and 5.3 times as much as the middle 20% of earners. ▪ Perhaps taxes helped offset these gains versus them leading to larger inequality between the rich and poor. Contoso 44 S u i t e s ▪ In order to see if this is true, we need to learn about two more types of income measures. Changes in Canadian 1) Before Tax or Market Income ▪ This is what we’ve been using so far in this lecture, it is Inequality all of the income earned by a household or person. Over Time 2) After-Tax Income ▪ This is a measure of income AFTER taxes and Federal income tax 2021 Federal income brackets tax rates transfers are paid. Since we have a progressive tax $49,020 or less 15% system where the more someone earns, the more tax they pay, looking at after-tax income is a better $49,020 to $98,040 20.5% measure of the changes in inequality. It also looks $98,040 to $151,978 26% at payments made to the poor like employment $151,978 to $216,511 29% insurance and the Canadian Pension Plan. More than $216,511 33% ▪ So, let’s examine the change in income over time by quintile once we adjust for taxes and transfers. Contoso 45 S u i t e s  Changes in These are the new graphs after adjusting for taxes and Canadian transfers (i.e., pension, unemployment insurance)… Q1/Lowest Quintile: Q2: Below Average Quintile Inequality Over 1976 Income: $12,000 1976 Income: $22,500 Time 2011 Income: $16,000 Difference: +$4,000 2011 Income: $28,400 Difference: +$5,900 Q3: Average Quintile Q4: Above Average Quintile 1976 Income: $30,000 1976 Income: $39,200 2011 Income: $39,100 2011 Income: $52,000 Difference: +$9,100 Difference: +$12,800 Q5: Top Quintile 1976 Income: $62,400 2011 Income: $87,100 Source: Statistics Canada, 2022 Difference: +$24,700 Contoso 46 S u i t e s  Changes in BEFORE TAXES & TRANSFERS Quintile Income Gains between 1976-2011 Bottom 20% of Earners Below Average 20% $600 $1,200 Canadian Middle or Average Earner $6,100 Inequality Above Average 20% Top 20% of Earners $13,300 $32,600 Over Time AFTER TAXES & TRANSFERS Quintile Income Gains between 1976-2011 Bottom 20% of Earners $4,000 Below Average 20% $5,900 Middle or Average Earner $9,100 Above Average 20% $12,800 Top 20% of Earners $24,700 ▪ Once we adjust for taxes & transfers, we see that the bottom 60% (bottom 3 quintiles) made better gains than first thought. However, we still see there was growing inequality, with the rich making Contoso the 47 largest income gains. So has inequality grown? S u i t e s  Gini Coefficient Measuring One way we measure or Income operationalize inequality is with Inequality something called the GINI coefficient (Corrado Gini, 1912). Contoso 48 S u i t e s  Gini Coefficient Measuring The Gini coefficient ranges between 0 (or Income 0%) & 1 (or 100%). Inequality A score of 0 or 0% indicates that income is perfectly distributed in the country. In other words, every citizen of the country has an equal income and overall income is perfectly shared equally between everyone. A score of 1 or 100% indicates that income is totally unequal. In other words, one person earns all the income and everyone else earns nothing. Contoso 49 S u i t e s  Gini Coefficient Scores closer to zero indicate that Scores closer to 1 or 100% indicate that the country is quite equal in terms of income inequality. the country is quite unequal in terms of income inequality. 0 1 Contoso 50 S u i t e s How has Economic Inequality Changed in Canada Since 1980? ▪ Market income inequality in Canada has grown tremendously in recent decades but especially since the late 1980’s. Inequality is at the highest levels seen in 50 years. ▪ Before taxes, the Gini coefficient in Canada grew from 0.36 in 1976 to 0.43 in 2021. ▪ After taxes and transfers, the Gini coefficient grew less yet still rose from 0.28 in 1975 to 0.31 in 2021. Source: Statistics Canada, 2024 Contoso 51 S u i t e s How has Economic Inequality Changed in Canada Since 1980? ▪ How do you think Canada compares to other developed countries in the world in terms of income inequality? Just for fun, rank the following countries from least to most unequal: a) Australia b) Canada c) France d) Germany e) Sweden f) USA g) England/UK Contoso 52 S u i t e s Gini coefficient by country (World Bank Data) ▪ According the World Bank (2024), the US is one of the most unequal developed countries in the world. In 2021 the rankings were: 1. Sweden (29.8%) 2. France (31.5%) 3. Canada (31.7%) 4. Germany (32.4%) 5. England/UK (32.5%) 6. Australia (34%) 7. US (39.7%) 8. USA (40%) ▪ Canada ranks in the mid-level of inequality among developed nations, but it has a higher level of inequality than is generally seen in Contoso Europe (e.g.,53 the EU average Gini is 29.6). S u i t e s Why did Inequality grow so much in Canada? ▪ OK so what gives? What happened in Canada since 1980 that made it so much more unequal? ▪ The answer is quite simple, it is due to 3 main reasons: 1) the VERY rich became much MUCH richer. 2) Workers lost bargaining power over their employers due to the loss of unions (a product of globalization). 3) Corporate Consolidation (big companies forcing smaller ones to sell to them or go out of business) means fewer corporations and, therefore, fewer CEO’s and owners that are richer. Contoso 54 S u i t e s  1) The Very Rich Get Even Richer Figure: Top 1% earners (black line) & Gini Growth (gray line) Income inequality grew because top income earners have gained a greater share of income; i.e. their incomes are higher than they used to be (Bank of Canada, 2022; World Inequality Report 2022). As seen here the top 1% of earners in Canada took home 13% of all income in 2009, compared to only 8% in 1980. But why did the very rich population’s incomes grow so much? Source: Saez & Veal, 2003; Fortin et al, 2012 Contoso 55 S u i t e s ▪ One of the reasons the rich have gained so much is due to rising CEO pay. Why have the rich gained so much? ▪ With globalization (i.e. the ability to move production overseas and play countries against each other for tax breaks and other benefits) corporations are making more money than ever before (Frydman & Saks, 2010; Piketty et al, 2014). Contoso 56 S u i t e s  ▪ Globalization has meant workers have less leverage or ability to resist collectively due to greater competition with workers in other countries (Western & Healy, 1998; Blanchflower & Bryson, 2004). This again increases corporate Why have profit and decreases worker shares of profit. the rich gained so much? ▪ CEO’s often get a share of this profit and are given credit for the success of the corporation, both of which have greatly increased their wages (Bebchuk & Fried, 2004). Contoso 57 S u i t e s 1) The Very Rich Get Even Richer ▪ For example, just looking at CEO pay growth from 2008 to 2016, we see that CEO pay rose from roughly $7.8 million a year to $10.6 million a year. ▪ This also means that CEOs went from earning roughly 180 times more per year than the average Canadian worker in 2008 to earning 209 times the average worker’s pay in 2016. Source: PressProgress, 2018 Contoso 58 S u i t e s 2) Workers Lost Bargaining Power Workers have more power over their employer when they work together (Western & Rosenfeld, 2011). For example, imagine one person or a few people going on strike versus everybody. And so to ensure they worked together, workers formed Labor Unions to cooperatively fight for their rights (ex: pension, holidays) and for higher pay. But due to globalization, we’ve seen the number of labour unions decrease substantially, which results in lower wages due to lack of bargaining power (Broffenbrenner, 2000; Freeman & Katz, 1994). Contoso 59 S u i t e s  2) Workers Lost Bargaining Power Figure: Unionization rate (black line) & Gini Growth (gray line) For example, the percent of Canadian workers belonging to a union has declined from a high of 38.5% in 1982 to 29% in 2011. So what gives? Why did unions start disappearing? Source: Andersen & McIvor, 2013 Contoso 60 S u i t e s 2) Workers Lost Bargaining Power The decline of unions is tied to globalization: you lose leverage over your employer when they can move to another country quite easily (Western & Healy, 1998; Blanchflower & Bryson, 2004). A worker’s power is tied to how easy they are to replace, and now employers can replace Canadian workers with workers in another country quite easily (for example, Apple had no problem finding equivalent workers in Ireland). We want Yeah… in that case I’ll move higher wages! the factory to Mexico Contoso 61 S u i t e s 2) Workers Lost Bargaining Power Today the majority of strong unions that still exist are in public sectors like Teachers, Fire Fighters, Nurses and other healthcare workers, and so on. Can you guess why unions remain for these professions? Contoso 62 S u i t e s 3) Corporate Consolidation means less small business owners Back in the day there used to be a lot of small businesses. However, because Multi-National Corporations have been able to grow so large and powerful due to globalization, they are able to put smaller businesses out of business or to threaten to put them out of business and thereby force them to sell to them (Chandler, 1994; Stiglitz, 2003). Contoso 63 S u i t e s 3) Corporate Consolidation means less small business owners An example is when the brand Oakley Sunglasses refused to sell their company to the huge glasses corporation, Luxottica, which owned the majority of eyewear stores in the US (Fashion & Law Journal, 2023; Last Week Tonight, 2017). Luxottica banned Oakley from their stores and by doing so forced Oakley to either sell their company to them or go out of business due to sales dropping significantly (ibid). Oakley sold to them as a result, which means Luxottica owns even more of the Sunglass market and becomes even richer. This also means fewer sunglass companies which means more profit for Luxottica and its CEO because they can raise prices higher due to having less competition (ibid). Contoso 64 S u i t e s 3) Corporate Consolidation means less small business owners Another example is small businesses in small towns. In the past, there used to be small hardware and grocery stores. But when corporations like Walmart and Canadian Tire moved in they were able to sell goods for cheaper and, for this reason, drove small stores out of business (Stone, 1997; Haltiwanger et al, 2009). Contoso 65 S u i t e s 3) Corporate Consolidation means less small business owners Small businesses not being able to compete with large corporations means small business owners (middle to upper class people) became less common (Stone, 1997; Haltiwanger et al, 2009). Instead, more money goes to corporations, which increases the amount of money that goes to corporate owners and CEO’s (ibid). Contoso S u i t e s 66 3) Corporate Consolidation means less small business owners Further, by controlling an entire industry like sunglasses or air travel, the companies that remain can work together to raise prices for the consumer. This is called an Oligopoly: when a market is dominated by a small number of sellers/producers, and it often results in competitor’s price-matching in mutually beneficial ways. This leads to higher priced goods for the average person and less money for them to spend on other things (for example, Telus, Bell, & Rogers hold 87.8% of the Canadian cell-phone market and have near identical prices) Another good example of this is the implementation of a $25 checked bag fee, which was almost simultaneously implemented by all airlines despite being in competition against each other (Air Canada & WestJet hold 80.2% of the Canadian airline market). Contoso 67 S u i t e s  MAIN TAKE AWAYS: There are a couple points I want you to take away from lecture so far. I. Inequality in Canada has grown quite a bit since 1980, to the point that Canada can be considered among the more unequal developed countries in the world. The rich have been gaining a larger and larger share of all income. II. Because of The Matthew Effect and, specifically, passive income, children of the very rich stay rich. Children of millionaires have a 98% chance (almost a guarantee) of also being a millionaire through inheritance. The rest of us have a 14% chance of ever becoming one (and not in $ but in everything we own). Contoso 68 S u i t e s  MAIN TAKE AWAYS: There are a couple points I want you to take away from lecture so far. I. Inequality in Canada has grown quite a bit since 1980, to the point that Canada is one of the more unequal developed countries in the world. The rich have been gaining a larger and larger share of all income. II. Because of The Matthew Effect and, specifically, passive income, children of the very rich stay rich. III. Inequality has risen so much because of globalization. Corporations are able to move overseas and play countries and workers off of each other to their benefit (i.e., race to the bottom). Additionally, there are fewer corporations because of corporate consolidation. Corporations because of these factors, are earning more than ever before and, since workers have less power to ask for a share of these new profits, it primarily goes to the CEO’s and owners/shareholders. Contoso 69 S u i t e s  MAIN TAKE AWAYS: This is a significant issue, but it is one that you may not have even noticed and the average Canadian is not as upset about it as they probably should be. Remember, Canada used to be more equal economically. Contoso 70 S u i t e s  Part C: Why Aren’t More People Mad About Rising Inequality? Contoso 71 S u i t e s  Rising Inequality and the Lack of Recognition & Response Throughout history when inequality grows in a way where the rich get very rich, and the poor get poorer people get very angry (e.g., Piketty, 2014). It has led to revolutions, riots, protests, and major social change throughout history (e.g., Scheidel, 2017). Yet aside from the Occupy Wall Street protests after the housing crash (which was focussed on a specific event, i.e. the 2008 crash), there has been very little political response to how much inequality has risen in recent decades in Canada (Saez & Veall, 2003, Stiglitz, 2013). Contoso 72 S u i t e s  Rising Inequality and the Lack of Recognition & Response Why do you think that is? Why has growing inequality since 1980 not caused major anger in the general public? Source: Statistics Canada, 2024 Contoso 73 S u i t e s  Rising Inequality and the Lack of Recognition & Response Let’s consider 2 reasons for inequality growing with little response: 1. Most homes gained an extra income earner, and this was not seen as unfair or unequal but as societal progress towards Women’s Rights (in other words, inequality grew but almost everyone’s quality of life did too). 2. Access to loans and debt has grown tremendously allowing access to the goods we want or need despite not having the money for it (this increases the Matthew effect). There are of course other reasons at play, but the keys are that people aren’t as mad as they might otherwise be because technically their lives got better in terms of being able to access the goods they want (i.e. can buy what they desire). The above two reasons are why they can do that. Contoso 74 S u i t e s  1. Households Gained an Extra Income People forget that a huge advantage (in terms of income at least) was gained by most families. For example, imagine the 1960s In 1960, the median family income in 2024 dollars was roughly $54,000 and it took only one earner—only 25% of women worked in 1960 (Statistics Canada, 2018). This one income was enough to live a good life; for example, buy two cars, a house without a big mortgage, raise two kids, and even afford a yearly vacation (Pew Research, 2014; 1961 Census of Canada). Imagine if you told these families that they were going to get a second income earner! They would assume their household income was going to double! Contoso 75 S u i t e s  1. Households Gained an Extra Income If you can live a great life on one income in 1960, they would have thought two incomes would be like… Contoso 76 S u i t e s  1. Households Gained an Extra Income And the number of women entering the workforce did rise quickly and substantially. The percentage of families with two income earners rose from 36 percent in 1975 to 69 percent in 2015. On the other hand, families with only one income earner decreased from 59 percent in 1975 to 27 percent in 2015. Thus, the average household should have seen it’s household income double as the number of income earners roughly doubled. Right? Source: Statistics Canada, 2016 Contoso 77 S u i t e s  1. Households Gained an Extra Income Yet household income did not rise that much (certainly not pool of money amounts). AFTER TAXES & TRANSFERS Quintile Income Gains between 1976-2011 Bottom 20% of Earners $4,000 Below Average 20% $5,900 Middle or Average Earner $9,100 Above Average 20% $12,800 Top 20% of Earners $24,700 So what gives? Are women just making so little they only raised their household’s income by a maximum of $24,700? What do you think? Contoso 78 S u i t e s  1. Households Gained an Extra Income We’ve only been looking at household income so far, let’s look at how individual people’s incomes have changed in Canada during the same period (again, after adjusting for inflation). Let’s also separate it by gender to see what’s going on. We see that females do earn less than males (more on this in gender inequality lecture). What we also see though, is that individual incomes have grown very little for women and actually decreased for men. For men from $43,500 in 1976 to $36,600 in 2011 (-$6,900). For Women, from $19,500 in 1976 to $24,300 (+$5,200). Source: Statistics Canada, 2024 Contoso 79 S u i t e s  1. Households Gained an Extra Income When we combine both men and women, we see the following change in individual incomes over time. What we learn is that the median individual income in Canada went from $31,400 in 1976 to $30,450 in 2011. In other words, we all make less today than people did in 1976 after adjusting for inflation. What this means is that the primary reason Canadians have seen an increase in household income is because of the rise in dual earner families–i.e., because more family members are working (Fortin et al, 2010) Source: Statistics Canada, 2024 Contoso 80 S u i t e s  1. Households Gained an Extra Income Why didn’t wages grow? (You know the answer already, it is….) Primarily because of globalization (companies shifting manufacturing overseas). ▪ Now, generally speaking, historically when people aren’t making wage gains, they will get mad and start demanding higher wages through protests or elections (e.g., Tilly, 1978). ▪ We all like to do better than our parents did. Studies (Clark, 2014; Easterlin, 1974) tell us that comparisons to one’s parents’ lives are a major factor in life satisfaction. Individual wages did not grow as much as the cost of goods (i.e., inflation) so technically our parents make less in their jobs than our grandparents (i.e than their parents did). This usually would cause great dissatisfaction. ▪ Despite our wages not growing, however, people were still doing better as a family due to gaining a second income (Fortin et al, 2010). ▪ Now we can all agree that from a social standpoint this was progress. Contoso 81 S u i t e s  1. Households Gained an Extra Income The women’s rights movement made huge strides for gender equality and women’s right to work and be paid equally. To be clear also, there is still work to do there as today women earn only 89 cents for every dollar a man does in Canada (Statistics Canada, 2024), but it used to be much worse. So women moving into the workforce was, for good reason, not seen as a bad thing. Contoso 82 S u i t e s  1. Households Gained an Extra Income But think of it from a purely economic standpoint. Forget gender even exists for a second. In 1960 you used to be able to live a good life with just one income earner. Today you need two! If this trend continues, who do we start sending out for the third income we would need? Needing twice as many people in a family to work as we used to in order to maintain the same standard of living is bad, but we all accepted it without demanding higher individual wages because it wasn’t seen as a negative. Instead, it was seen as societal progress and women’s rights (Fraser, 2013; Hochschild, 1990). I’m not saying in any way that women moving into the workforce is a negative trend, just that it masked how much individual job incomes did not grow over the last 40 years and, by doing so, made us less aware of how much more each family has to work to maintain a good standard of living (for example, one person working is 40 hrs/week whereas two is 80 hours). Contoso 83 S u i t e s  2. Inequality Became Invisible So people accepted stagnant wages that did not rise because their household income rose as a result of women moving into the workforce. This is the first reason why people have not become upset at rising inequality. The second reason I’ll give you is that inequality became invisible. How can inequality possibly become invisible? Any Ideas? It is tied to how much debt has risen in Canada over the last four decades. We discussed income in part 1, but there is another part of economic inequality. That is wealth, and many people forget about wealth when thinking about the difference between rich and poor. 2) Wealth Refers to a person’s Net Worth- i.e. their total assets (possessions, money in bank accounts, investments, pension, etc.) minus liabilities (loans, debts, mortgages, etc.). Contoso 84 S u i t e s  There are three main components of Measuring wealth: Wealth 1) Assets: Examples: real estate value, vehicle value, cash on hand or in bank account, investments, retirement funds, value of other possessions (jewellery, electronics, etc.) 2) Liabilities: Examples: typically just different kinds of debt such as mortgage, auto mobile, student loan, credit card debt, etc. 3) Net Worth: Net worth= Assets minus Liabilities. Contoso 85 S u i t e s For example: Often times when we think of how rich people are we think of income and forget about people’s wealth. People can have large amounts of one and small amounts of the other. For example, take myself… 1) Income (what you think) 2) Wealth (reality) Large student debt Professor Negative net worth (owe MUCH more in debt Makes a good salary than I have assets) Should be able to Eats rice & beans afford nice things almost every day (does not really like rice & beans) Looks Good by income Looks poor by wealth Contoso 86 S u i t e s Wealth vs. Income example 2: Conversely, people can have large amounts of wealth but look poor by income. 1) Income (what you think) 2) Wealth (reality) Does not work, no Owns a large home employment income without a mortgage. Complains about Has a large pension how expensive and inheritance from everything is deceased spouse. Stays at home, does Net worth over a not do much million. Looks poor by income Looks rich by wealth Contoso 87 S u i t e s  2. Inequality Became Invisible: Growth of Debt The problem with net worth and income is that each paint an incomplete picture on their own. You need to look at someone’s finances holistically (both income & wealth) to understand how rich or poor they are. It is particularly important to look at wealth because debt is becoming increasingly common in Canada. According to Statistics Canada, in 1980 the average household owed roughly 85% of their annual income in debt. By 2011, this had risen to 145%, and by 2023 it was 180% (Statistics Canada, 2024). Canadians are carrying more credit card debt, have greater student loans, car loans, and higher mortgages. All of which increases the risk of bankruptcy and the payments a family must make in interest each month. Source: Andersen & McIvor, 2013 Contoso 88 S u i t e s  2. Inequality Became Invisible: Growth of Debt Back in the day (our grandparents time), debt was viewed very poorly (Calder, 1999). You did not want to be in debt and those that had large debts were seen as desperate and irresponsible because interest on loans is not cheap. For example, a mortgage of $500,000 at an interest rate of 5% and paid over 30 years will result in a total re-payment of $960,643, which represents paying $460,643 in interest (Government of Canada Mortgage Calculator, 2024). Contoso 89 S u i t e s  2. Inequality Became Invisible: Growth of Debt Today, most of us accept that we will spend most of our lives in debt. I can’t stress to you enough how much this is a new reality and it has been driven primarily by the rise in student debt and the rise in home prices, but also by the rise in credit card debt. Source: Andersen & McIvor, 2013 Source: Hoyes & Michalos, 2023 Rising debt is important because it is a form of invisible inequality—i.e. an inequality that exists but is impossible to see unless someone tells you what their debt load is. Contoso 90 S u i t e s  An Example of How Wealth/Debt is Invisible Two families can look IDENTICAL but have vastly different financial situations, for example: Family 1 Family 2 Used loans to pay for everything. No loans, had scholarships for school and family had money to chip in on house. House and car worth= $250,000 House and car worth= $250,000 Car debt= -$ 15,000 Car debt= $ 0 Mortgage debt= -$200,000 Mortgage debt= -$ 100,000 Student loan debt= - $ 40,000 Student loan debt= $ 0 Net worth= -$5,000 Net worth= $150,000 Contoso In other words these families look the same but one is MUCH richer than the other. S u i t e s 91 For example Wealth also affects the amount of money a family has because it subtracts from income. Family 1 Family 2 In terms of income family 1 has loan In terms of income for family 2: payments: Monthly income= $3,363 Monthly income= $3,363 Car payment= -$ 250 Car payment= -$ 0 Mortgage payment= -$ 946 Mortgage payment= -$ 350 Student loan payment= - $ 300 Student loan payment= - $ 0 Net Monthly Pay= $1,867 Net Monthly Pay= $3,013 Contoso 92 S u i t e s For example Family 1 Family 2 Net worth= -$5,000 Net worth= $150,000 Net Monthly Pay= $1,867 Net Monthly Pay= $3,013 To re-iterate: These two families look the same, but they have vastly different wealth levels. This creates vastly different incomes per month after debt payments. This is an example of how inequality becomes more invisible to the eye the more household debt levels have grown. Contoso 93 S u i t e s  Lecture Conclusions Inequality in Canada has grown in the last 40 years. The rich have become much richer, and the average person’s income has stayed the same without growth after inflation. Stagnate incomes have not caused problems because families gained household income through the addition of another income earner (i.e. women’s movement to the workforce). In addition, Canadian families have been able to still maintain the lifestyle they seek through rising debt and buying things with credit. Rising debt has only exacerbated (i.e., made worse) the Matthew Effect due to things like loan interest payments. This is an important trend to watch as if we stay on this path of stagnate incomes then we may reach a crises (Bank of Canada, 2023; OECD, 2023). There is not really another family member to send to the workforce (barring adult children remaining at home) and debt levels are currently as high as they can sustainably be (ibid). Based on current trends, we can expect income inequality to continue to grow in the next decade unless something is done (ibid). 94  One Last Thing: Global Income Inequality Contoso 95 S u i t e s  ▪ In terms of how we measure poverty: Absolute Poverty is the lack of resources Measuring necessary for material well-being: food, water, housing, land, and health care. Poverty Relative poverty refers to a deficiency in material and economic resources compared with some other population. Extreme poverty: Living on less than $2.15 a day (World Bank, 2024). Contoso 96 S u i t e s  ▪ 10% of the world’s population or roughly 700 million people live in extreme poverty, i.e. live on less than $2.15 a day (World Bank, 2024). Global Income ▪ The richest 1% of adults (ages 20 and Inequality older) in the world own nearly half (48%) of global household wealth (Oxfam, 2023). ▪ The richest 10% of adults own between 76- 87% of total global wealth (Credit-Suisse, 2024; Oxfam, 2023). The poorest half of the world’s adult population owns barely one percent of global wealth (Credit-Suisse, 2024). Question: Will you ever be in the top 10% of wealthiest people in the world? Contoso S u i t e s 97  Question: Will you ever be in the top 10% of wealthiest people in the world? If you have just $4,210 in wealth you are Global Income among the wealthiest half of the world’s Inequality population (Credit-Suisse, 2024). If you have $77,000 in wealth you will join the top 10% of the world’s wealthiest people! (Credit-Suisse, 2017) Many of us will be among the wealthiest people in the world due to being born in a wealthy country. Is this something we deserve or is it just the luck of being born in a country where we have the chance to do this? Contoso S u i t e s 98 THE END.  What follows is a bonus example of the Matthew Effect to further demonstrate how it works.  2. Growth in Debt & Loans and The Matthew Effect Now the rise in debt not only makes inequality invisible, it also plays a HUGE role in the Matthew Effect (i.e. the forces that keep the rich rich and the poor poor). I want you to consider 3 people to illustrate this. Cassandra Tim Chelsea (upper class) (Middle class) (Working class) Contoso 101 Now let’s realistically follow these 3 through their early adult years. S u i t e s  2. Growth in Debt & Loans and The Matthew Effect Cassandra Tim Chelsea (upper class) (Middle class) (Working class) I’m going to walk you through the lives of each of these 3 until they are all 30 years old. All will get a business degree, own a vehicle, and all will buy a house by the time they are 30. Cassandra will inherit $300,000 from her grandparents and her parents will pay for her expenses in university. Tim and Chelsea will not inherit anything. Tim’s parents will help a bit in college, but Chelsea’s parents are unable financially to help so she is on her own. ACTIVITY: I want you to guess what each’s net worth will be by the time they are 30. Write it down, take a best guess, this is just for fun. Contoso 102 S u i t e s  Life Event 1: Graduating High School Cassandra Tim Chelsea (upper class) (Middle class) (Working class) Cassandra is no Jennifer Gates but Tim never inherits anything. Chelsea never inherits anything. both her parents are lawyers and Chelsea works during high-school but she she inherited $300,000 when her Tim does not invest anything in the stock market. He works has to pay for her phone, car insurance, grandparents passed away. clothes, etc. so that money is spent. during high school though and saves $8,000 for college because She has to buy her own car & gets a used Jeep Cassandra is smart and invests this his parents pay for his car Wrangler from a dealership. her pa