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Movements in income inequality in Canada, 1944-2010

Summary:
Here are the estimates for the Gini coefficients for Canada, taken from individual tax files (see here for more about where the data came from): As was the case for median incomes, I am encouraged by the fact that the benchmark Statistics Canada series and the tax file data say basically the same thing about the evolution of income inequality over the period in which they overlap: the Gini coefficient starts to increase from the late 70s/early 80s until about 2000 and then levels off. The tax file data suggest that there was a significant increase in inequality srting in the late 1950s, peaking around 1970 and then falling again; you can even persuade yourself that the Statistics Canada series picks up the final part of that decline before the trough around 1980. We're not

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Here are the estimates for the Gini coefficients for Canada, taken from individual tax files (see here for more about where the data came from):

Gini TS

As was the case for median incomes, I am encouraged by the fact that the benchmark Statistics Canada series and the tax file data say basically the same thing about the evolution of income inequality over the period in which they overlap: the Gini coefficient starts to increase from the late 70s/early 80s until about 2000 and then levels off.

Gini TS SC

The tax file data suggest that there was a significant increase in inequality srting in the late 1950s, peaking around 1970 and then falling again; you can even persuade yourself that the Statistics Canada series picks up the final part of that decline before the trough around 1980.

We're not limited to the Gini here; I've also calculated smooth cubic splines for the distribution of income and income shares. Here are two other statistics, the ratio of the 90th and 10th percentiles, and the ratio of the income shares of the top and bottom income quintiles:

9010 s5s1

These statistics say the same thing: a sizeable increase in inequality starting in the late 1950s, reversing around 1970 and then increasing again around 1980.

Those swings in the 1960 and 1970s look important to me, but they are also worrisome as far as the credibility of these data are concerned. Although the current Statistics Canada income table start in 1976, there is existing evidence about what happened to income inequality during this period, in the form of Michael Wolfson's 1986 article "Stasis amid change: Income inequality in Canada 1965", published in the Review of income and Wealth. I had come across this study before starting this project, and had remembered its main conclusion:

Income inequality in Canada has not changed significantly over the past two decades, though this apparent stability may be surprising in view of the major economic and social changes that occurred over this period.

When I look at the income inequality statistics extracted from the tax file data for this period, I see large movements. What explains the conflicting conclusions?

When I looked more closely at Wolfson's results, I came to the conclusion that the conflict is in the conclusion, not necessarily in the data. For example, his Gini estimates also suggest a peak in 1970:

Gini wolfson

The same peak occurs when you look at the ratio of the top and bottom quintile income shares:

S5s1 wolfson

Wolfson does make note of the movement in the inequality measures:

Inequality rises from 1965 to the early 1970s, drops to a low in 1979 or 1982, and then increases to 1983

Notwithstanding, 

it may be concluded that the current conventional wisdom is largely correct - the shape of the distribution of total money income has not changed appreciably in the last two decades.

For both sets of estimates, a straight line drawn from 1965 to 1983 is indeed roughly horizontal, and if the only data you're looking at are from those years, it's hard to get a sense of how large or important those deviations from that horizontal line are.

But in retrospect, the longer time series obtained from the tax data shed a different light on those movements. The increase in income inequality during the 1960s and the offsetting decrease in the 1970s are of a magnitude similar to that of the subsequent increase in the 1980s - and the increase in inequality after 1980 is widely agreed to be large and significant.

Something important happened to income inequality during the 1960s and the 1970s. But I have no clue as to what caused those changes.

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