Tuesday, December 18, 2012

The myth of income inequality in Canada

A November 2012 study titled "Measuring Income Mobility in Canada" by Charles Lammam, Amela Karabegović, and Niels Veldhuis confirms what has been known for many years and what any reasoning  person should quickly realize: the portion of people who spend a long time in poverty is far smaller than the poverty industry would have us believe.

Most studies of income differences are cross-sectional, that is they take a sample at a moment in time and analyze the data, dividing the population into income quintiles.  Such studies always show a certain fraction of the population is at the lower end (someone has to be) and a certain population living below what is called "the poverty line". The data does not change much over the years, so collectivists call for higher taxes on the productive members of society, more income and asset redistribution by the force of government powers and all manner of lifestyle support programs to help these supposedly poor people.

What these studies fail to do is track information longitudinally over time to see what actually happens to the individuals who are initially at varying levels of income.  To the chagrin of those who would seize our production and give it to others, the problem of poverty is far lower than imagined since the large majority of those who are "poor" at a particular time do not stay poor. The table below is extracted from the study and demonstrates that in a short five years over half (53%) of the lowest income people had moved to a higher income group.

As the time horizon was lengthened the results were even more remarkably good, with 83% of the lowest earners moving up in a ten year period.  The greatest income gains were made by those who started out at the lowest levels.  This should not be surprising since many of those people are at the start of their earnings life and have less training, experience and value to employers than those with more experience.  It is entirely natural that their incomes would rise over time and that most of them would succeed. 

Here is another way of looking at upward mobility as taken from the data in column 2 of Table 2 above. Notice how the greatest gains were made by the lower starters and how gains reduced as we move up the quintiles.

Finally, the study looked more closely at how far the different groups moved.  Most notably, the lowest intial income quintile saw 26% move up by one quintile, 25% moved up two quintiles, 20% moved up to the top 40% and 12% moved up to the top 20% of all income earners.  This is certainly not a story of long term poverty and certainly is not a justification for the massive poverty industry that surrounds us and often operates to make it harder for the poor to rise while punishing the more productive for being productive.

After just 10 years, only 17% of those who were in the bottom quintile were still in that quintile.  That's about one sixth of the size of the problem often quoted by socialists.  We should celebrate the fact that despite the many government controls and redistribution schemes concocted over the decades, that we still have a free enough society to see 83% of the poorest people rise from poverty in a relatively short time. The study also looked at 19-year mobility and of course found it was even better than for 10 years, but by ten years there were only a few people left in the lowest income level so naturally there was little room for improvement.

This data is very similar to that published in a 1999 book by W. Michael Cox and Richard Alm titled "Myths of Rich and Poor".  They used U.S. data from 1975-1991 and published tables much like the ones in the current research paper. I am glad and not surprised to see that Canadian data is very similar to the U.S.

Will the poverty industry acknowledge the facts in this data and close down most of their wasteful efforts?  Will they acknowledge that individuals are properly responsible for their own lives and that forcing others to pay for the wants of others is immoral?  Will they agree that there is only a very small number of truly poor people who can be helped by voluntary charity and that using the force of government to take earnings from productive people is immoral?  Not likely - they will have all manner of denials and will continue to ask for ever more money, much of which goes to pay the salaries of poverty industry workers instead of directly helping the few people in seriously bad circumstances.

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