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The Contribution of Labour Markets, Demographics and Public Redistribution to Inequality: A Decomposition Analysis for Canada, 1986-1996

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  • Marcelin Joanis
  • Edgard Rodriguez

Abstract

The paper examines the evolution of the inequality of family income in Canada during the 1986-1996 period. Our main objective is to understand why overall market income inequality rose, while that of disposable income did not. To analyze this question, we use data from the Survey of Consumer Finances and two distinct decomposition methodologies. First, by decomposing entropy indices (Theil index and mean logarithmic deviation), we look at the impact of various family characteristics on market and disposable income inequality in 1986 and 1996. We analyze the rise in market income inequality and the impact of the tax and transfer system on the basis of those results. Second, by decomposing the Gini coefficient, we investigate the equalizing role of private and public income sources. Those results allow us to assess the respective role of taxes and public transfers in a context of rising market income inequality. We find that labour market characteristics of the family (labour force attachment, part-time/full-time work) were the most important factors to explain both levels and growth of market income inequality. Demographic characteristics such as family structure and age also played a significant but smaller role. The increase in the population shares of single mothers, together with the relative deterioration of the average income of younger and one-person families have exacerbated the upward pressure on inequality created by the decrease in employment and the rise of part-time work. Population ageing and geographic disparities have not been significant factors of the growth in market income inequality between 1986 and 1996. Our results suggest that public redistribution was unevenly successful in eliminating between-group inequality arising from different family characteristics. Its equalizing effect was strong for between-group inequality arising from labour force attachment and old age (characteristics that are well targeted by transfer programmes), but it was smaller for inequality arising from demographic characteristics of the family. We conclude that the stabilizing action of the tax and transfer system and rising taxes were jointly responsible for the stability of disposable income inequality between 1986 and 1996. Ce document de travail examine l’inégalité des revenus entre les familles canadiennes au cours de la période 1986-1996. Il vise principalement à comprendre pourquoi l’inégalité du revenu de marché s’est accrue, alors que l’inégalité du revenu disponible est restée relativement stable. Pour analyser cette question, nous avons recours à une approche de décomposition, que nous appliquons à l’Enquête sur les finances des consommateurs. La décomposition des indices d’entropie de Theil nous permet d’étudier l’impact de différentes caractéristiques familiales sur l’inégalité du revenu de marché et du revenu disponible en 1986 et en 1996. Nous expliquons l’augmentation de l’inégalité du revenu de marché sur la base de ces résultats. Ensuite, en décomposant le coefficient de Gini, nous étudions le rôle égalisateur de diverses sources de revenu privées et publiques. Les résultats de ce second exercice de décomposition nous permettent d’étudier les rôles respectifs des taxes et des transferts gouvernementaux dans un contexte de croissance de l’inégalité du revenu de marché. Nous trouvons que les caractéristiques familiales liées directement au marché du travail (participation ou non au marché du travail, travail à temps partiel ou à temps plein) ont été les plus importantes pour expliquer tant le niveau que la croissance de l’inégalité du revenu de marché. Les caractéristiques démographiques comme la structure familiale et l’âge ont aussi joué un rôle significatif, mais moins important. L’augmentation du nombre de mères monoparentales, de même que la détérioration du revenu moyen des jeunes familles et des personnes seules ont exacerbé les pressions à la hausse sur l’inégalité créées par le déclin du taux d’emploi. Le vieillissement de la population et les différences géographiques n’ont pas été des facteurs d’inégalité significatifs entre 1986 et 1996. Nos résultats montrent que la redistribution publique connaît un succès inégal dans l’élimination de l’inégalité entre les sous-groupes de la population. Son impact égalisateur a été fort quant à l’inégalité provenant du faible attachement au marché du travail et à la vieillesse, mais il a été plus mitigé lorsqu’il est question du revenu relativement faible des personnes seules, des familles monoparentales et des travailleurs peu qualifiés. Nous concluons que l’action stabilisatrice du système fiscal et la hausse des taxes sont conjointement responsables de la stabilité de l’inégalité du revenu disponible entre 1986 et 1996.

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Bibliographic Info

Paper provided by Department of Finance Canada in its series Working Papers-Department of Finance Canada with number 2001-18.

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Handle: RePEc:fca:wpfnca:2001-18

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