Income Inequality and Basic Income

1
Ryan Curry-Flynn
#20063960
Dr. David Johnson
POLS4100
April 13th, 2016
POLS4100 Paper: Income Inequality and Basic Income
Although the election process diers dramatically between the two

countries, the most recent election in Canada and the current election in the
United States have one major thing in common. A key issue throughout the
Canadian election and so far in the United States election has been income
inequality. While the economies have essentially rebounded from the crash in
2008, the lower and middle class seem to be worse o than ever before. To
understand how it is happening, we must look at the concept of the free market.
From there we will examine some of the practices that contribute to income
inequality. Then evaluate our situation to see where we can go from here.
The very idea of the free market has done significant damage to the
economy and has directly contributed to income inequality. The power of the
free market is that it has conditioned people to think a certain way and accept
the outcomes brought upon them by the free market. Any inequality created by
the market is thought to be natural and a by-product of market forces. Working
for wages that aren't enough to live on is somehow just because the market
pays you youre worth. Raising the minimum wage, making tuition free, or other
forms of government intervention only make the situation worse because the
free market is better at doing something that the government.1 The concept of
the free market is accepted by so many that now the only debate had over the
market, is how much government intervention should there be. The right
typically want smaller governments with less intervention, while the left typically
wants larger governments with more intervention. Where someone stands
depends on who they trust more between the government and the free market.
According to former Secretary of Labor Robert Reich of the Clinton
administration, there can be no free market without the government as the free
market doesn't exist the wilds beyond the reach of civilization.2 In most
democracies, rules dictating the free market come from legislatures, courts, and
administrative agencies. Government doesnt intrude on the free market
because it has created it.
The free market isnt an invisible force that acts consistently and
according to conditions, rather it is constructed by individuals. If the free market

was this powerful invisible force that already existed, we would have figured it
out by now and adopted the same market rules across the world to maximize
our benefit. Instead, there are many dierent free markets across the world.
The market is a reflection of a society and the values of the people within that
Robert B. Reich Saving Capitalism: For the Many, Not the Few. 2015. Page 5.
Robert B. Reich Saving Capitalism: For the Many, Not the Few. 2015. Page 4.
society. When comparing the United States and Sweden we can see stark
dierence in the rules that govern their respective markets. The idea of the
american dream has created a market in the United States that values individual
success and oers big rewards to those who take risks and are lucky enough
not to fail. Meanwhile, Sweden as a society is more caring and oers free
healthcare and university education to their citizens. There are many in Canada
and the United States who believe free university education would do more
harm than good. Speculation about how the market could react negatively is
oered as a justification to why it is a bad idea for our economy. This same type
of thinking would be laughed at in Sweden. A university education is a benefit to
society and one shouldn't have to go into debt to it. This was seen as the
common sense thing to do and the market was built around this idea. The
market was shaped around an idea then just like it was in the United States
when markets were deregulated. The argument then was that the rules were
holding companies back with red tape and restrictions shouldnt be placed on
markets. Since then, financial institution have gained tremendous financial and
political power. The sooner we understand that the free market is a myth, the
sooner we understand that the market does change, and usually in someones
favour.
In the age of maximizing profit for shareholders it seems we read about
layos every other day. This year has been a tough one for the oil industry in
Canada, so layos in that sector are understandable. It makes sense for layos
to happen when an industry is struggling as much as the oil industry here in

Canada is. With the price of a barrel of oil at the lowest it has been in nearly 5
years, companies are making substantially less money and cutting costs is the
easiest way to prevent losing money.3 Cutting costs is also a great way for
companies to make even more money. Over the last few months there have
been many layos in Canada where companies claim the goal is to cut costs
and boost eciency. One of the most recent comes from Saputo who
announced they will be closing three plants in Eastern Canada by the end of
next year.4 This layo hits close to home as approximately 100 of the 230 jobs
are being lost here in Sydney, Nova Scotia. While Saputo expects the move to
save them approximately $9 million dollars a year by 2019, the already
struggling economy of Cape Breton will be made even worse with the loss of
those 100 jobs.
I often wonder when the trend of cutting costs for the sole purpose of
boosting profit will end. It is dicult this think of this practice as sustainable in
the long run for two reasons. The first being public perception. After the most
recent layos by Saputo here, there are many who vow to never touch one of
their products again. The public aected by the cuts take it very personally, as
they should. In Ontario Heinz announced it would be shutting down a plant and
3
"US Oil Closes up 5 Pct on Surprise Crude Stocks Draw." CNBC. April 06, 2016. http://
www.cnbc.com/2016/04/04/looming-gasoline-glut-pulls-down-crude-oil-prices.html.
4
"Canada's Largest Dairy To Shut Down Three Plants." The Hungton Post. March 22, 2016.
http://www.hungtonpost.ca/2016/03/22/saputo-cutting-costs-by-closing-three-canadianplants-impacting-230-employees_n_9524324.html.
Frenchs swooped in to produce ketchup using Canadian ingredients.5 Due to

what felt like a betrayal on Heinzs behalf, many have stopped buying Heinz in
favour of Frenchs. The good news for Frenchs doesn't stop there as A&W
announced that they will now be using Frenchs ketchup and mustard in their
850 locations across Canada.6 Obviously this can be seen as A&W trying to
cash in on the current admiration for Frenchs, but it has real meaning for the
700 people who are now employed by Frenchs in Ontario.
The second reason is that cutting costs can actually be quite expensive.
Paying workers low wages or laying them o all together can put a hefty burden
on the state. When workers are working a combination of part-time jobs or a
full-time job and still cannot aord the basic necessities in life, they will turn to
the government for support in the form of welfare, employment insurance,
medicaid, or food stamps. It is estimated that the low wages paid by Wal-Mart,
McDonalds, and other large profitable companies costs the United States
government nearly $153 billion a year. 7 Meanwhile, in the 12 months ending
Carolyn Thompson. "'Bye. Bye. Heinz': French's Ketchup Sells out after Online Post Praising
It and Its Ontario-grown Tomatoes." National Post Bye Bye Heinz Frenchs Ketchup Sells out
after Online Post Praising It and Its Ontario grown tomatoes. February 29, 2016. http://
news.nationalpost.com/news/canada/bye-bye-heinz-frenchs-ketchup-sells-out-after-onlinepost-praising-it-and-its-ontario-grown-tomatoes.
5
Christina Commisso. "A&W Makes Switch to French's Ketchup in Canada." CTVNews. March
29, 2016. http://www.ctvnews.ca/business/a-w-makes-switch-to-french-s-ketchup-incanada-1.2836035.
7
Ken Jacobs. "Americans Are Spending $153 Billion a Year to Subsidize McDonalds and WalMart's Low Wage Workers." Washington Post. April 15, 2015. https://
www.washingtonpost.com/posteverything/wp/2015/04/15/we-are-spending-153-billion-a-yearto-subsidize-mcdonalds-and-walmarts-low-wage-workers/.
January 2016, Wal-Mart recorded a gross profit of $130.6 billion.8 So while WalMart is enjoying massive profits, the American tax payers are having to
subsidize people working there. There is another aspect to Wal-Marts low
wages that make this situation even more perverse. The low wages paid to their
employees could create a dependancy on their products out of necessity.
Having to rely on government assistance to get by means that some employees
of have very little to no disposable income and must fill their needs as cheap as
possible. If you're not looking to spend a lot of money, Wal-Mart is a great place
to go. So this means we have a system that doesn't pay a living wage, forces
workers to rely on the government for assistance, and requires them to spend
what little money they have where they work because they cannot aord to shop
anywhere else. As the United States falls deeper and deeper into debt, I cant
help but wonder how much longer it can continue down this path of corporate
welfare.
Technological advances are great, and any society should strive to
progress as much as they can. How the society uses the newfound technology
is what matters. As automation is becoming more and more widespread, it is
being used to replace jobs that were once done by people. Because of this, the
consumer has access to cheaper goods which is generally a good thing.
However, the job losses can mean that typical families have less money to
spend on those goods. Many supporters of automation believe that the new
8
"Gross Profit for Wal-Mart." WikiInvest. http://www.wikinvest.com/stock/Wal-Mart_(WMT)/

Data/Gross_Profit.
technology will create a new demand for human jobs. While this may be the
case in some specific industries, I dont believe that the new job creations are
keeping up with the overall job losses. While manufacturing output is at an alltime high, manufacturing employment is today lower than it was in the later
1940s.9 A 2014 Oxford study found that the number of US workers shifting into
new industries has been strikingly small: in 2010, only 0.5% of the labor force
was employed in industries that did not exist in 2000.10
Globalization has the honour of contributing tremendously to income
inequality while simultaneously contributing to income equality. Free trade has

done incredible things to lift entire countries up out of poverty and raise their
standard of living. The unfortunate part for the typical Canadian and American
worker is that it has come at the cost of their livelihoods. By opening up the
world economy we have been able to spread not only wealth, but cultures and
values to other countries. Through trade agreements, we can see to it that
countries engage in democracy and guarantee some rights to their citizens. To
take part in the world economy and reap the benefits they simply have to play
by the rules we set for them. In this scenario, it is hard to see a loser. New found
wealth from jobs created by free trade has transformed the lives of millions. The
Moshe Vardi. "Are Robots Going to Steal Your Job? Probably." The Guardian. April 07, 2016.
http://www.theguardian.com/commentisfree/2016/apr/07/robots-replacing-jobs-ludditeseconomics-labor?CMP=twt_gu.
10
Moshe Vardi. "Are Robots Going to Steal Your Job? Probably." The Guardian. April 07, 2016.
only problem is that a lot of those jobs are not created, rather they have been
outsourced from Canada or the United States.
One metric that is used to measure inequality is the gini coecient. There
are many variations of the gini coecient, but the premise of the measurement
remains the same throughout. A measurement of 0 describes a perfectly equal
society where every person has the exact same amount of income. A
measurement of 1 describes a society where there inequality is so high that all of
the income is owned by one person. According to the Fraser Institute, Canadas
after tax gini coecient in 2011 was 0.3156 and the before tax gini coecient in
2011 was 0.4379.11 This illustrates that income inequality isn't a dire problem in
Canada thanks to our tax system. The pre-tax number is much higher than the
post-tax number. According to this one metric, taxation and redistribution is an
eective way to reduce inequality.
Another way that income inequality could be measured is by comparing
the wages of the average worker to the wages of a CEO. A report by the
Canadian Centre for Policy Alternatives looked at the average, median, and total
compensation of Canadas 100 highest paid CEOs since 2008. The results were
quite staggering as they showed that the top 100 CEOs in Canada made nearly
200 times what the average Canada made in that same year. Total
compensation of the 100 highest-paid corporate executives in Canada in 2014
11
Matthew Lau. Income Inequality: A Crisis in Canada or a Political Ploy? The Fraser
Institute. 2015. Page 7. https://www.fraserinstitute.org/sites/default/files/income-inequality-csrsummer-2015.pdf
amounted to $896 million. That is down marginally from 2013, but it still exceeds
the reported budgetary deficits for 201415 of every province in Canada with the
exception of Ontario, Quebec, and Newfoundland and Labrador. 12
In 2014, the average salary of the highest paid 100 CEOs in Canada was
$8.96 million. Meanwhile, average earnings across the Canadian population for
someone working full time, year-round were $48,636 in 2014, while the average
minimum wage produced income of $22,010.13 To put this discrepancy into
perspective, the average top-100 CEO will have earned the average workers
pay by 12:18 p.m. on January 4, 2016 the second paid day of the year and
the average minimum-wage workers pay by 2:07 p.m. on New Years Day.14
Comparing the wages of the average worker to top CEOs may not seem
useful, but it illustrates the disparity because the average and the richest in our
society. The middle class is the driving force behind our economy and as it
shrinks and more money goes to the top, the worse o it is.
Income inequality in Canada may not be as extreme as the inequality that
exists in the United States, but it certainly is a problem. According to a study

published in 2014 by the Broadbent Institute, The wealthiest 20% of Canadians
Hugh MacKenzie. Staying Power: CEO Pay in Canada. Canadian Centre for Policy
Alternatives. January 2016. Page 5. https://www.policyalternatives.ca/sites/default/files/
uploads/publications/National%20Oce/2016/01/Staying_Power_CEO_Pay.pdf
12
13
14
10
control 67.4% of the wealth while the poorest 20% do not control any wealth,
and are in fact in debt (-0.1%).15 The dierence between the people at the top
and the people at the bottom is staggering. However, the lack of wealth isn't
restricted to the bottom 20% of the population. According to another study by
the Broadbent Institute in 2012, the bottom 30% of Canadians accounted for
less than 1% of all wealth; the bottom 50% combined controlled less than
6%.16 Meanwhile, the top 10% of Canadians accounted for almost half
(47.9%) of all wealth in 2012.17
Half of the population doesn't even come close to controlling 10% of the
wealth in this country. This is an incredibly uneven distribution of wealth. Some

levels of inequality are understandable and even acceptable. There are people
within our society who generate more wealth and opportunity than others. It is
only fair that these people should be rewarded. This is a core principle of
capitalism and that opportunity for success has driven so many to create great
things that have bettered society. However, it seems more and more likely that
the system is rigged rather than rewarding those who take chances.
The Wealth Gap: Perceptions and Misconceptions in Canada. The Broadbent Institute.
December 2014. Page 6. https://d3n8a8pro7vhmx.cloudfront.net/broadbent/pages/31/
attachments/original/1430002077/The_Wealth_Gap.pdf?1430002077
15
16
Haves and Have Nots: Deep and Persistent Wealth Inequality in Canada. The Broadbent
Institute. September 2014. Page 3. https://d3n8a8pro7vhmx.cloudfront.net/broadbent/pages/
32/attachments/original/1430002827/Haves_and_Have-Nots.pdf?1430002827
17
11
The Broadbent Institute surveyed Canadians about income inequality. This
survey revealed what Canadians think the ideal distribution of wealth should be,
and what they think the actual distribution of wealth is. This showed that
Canadians understand that there is inequality, and even that there should be
some inequality. However, it seems like Canadians didnt fully understand just
how unequal Canada is.
Canadians believe the actual wealth distribution in Canada has the top
20% owning 55.5% of the wealth, and the poorest 20% owning 5.8% of the
wealth.18 Canadians believe that the ideal wealth distribution in Canada would
have the top 20% owning 30.3% of the wealth, and the poorest 20% owning
11.5% of the wealth.19 The ideal distribution and perceived distribution is pretty
far o from what is reality in Canada. As previously noted, the wealthiest 20% of
Canadians own over 67% of the wealth and the poorest 20% own no wealth
and are actually in debt. This is a major problem with in income inequality in
Canada. Its not that the poorest in Canada has too little, it is that they have
nothing.
There is no easy solution to solving the income inequality problem in
Canada or any other country across the world. One major eort across North
America is to raise the minimum wage to a livable wage. That is a point where
18
The Wealth Gap: Perceptions and Misconceptions in Canada. TheBroadbent Institute.

19
The Wealth Gap: Perceptions and Misconceptions in Canada. TheBroadbent Institute.

12
someone working the minimum wage doesn't need to go without and can aord
the basic necessities in life. There is traction in this movement as many cities
have raised their minimum wage to $15 an hour. The left and the right are unable
to agree on what will happen as a result of this increase. The left generally
believes it will put more money in the economy and stimulate growth, while the
right generally believes it will cost jobs and cause prices to rise. The truth is
likely somewhere between those arguments.
Another possible solution is a guaranteed annual income or a basic
income. These two ideas are slightly dierent but work in the same way. It would
ensure that every person in a society that meets a certain set of criteria, would
receive enough financial support from the government to maintain a reasonable
standard of living. This type of program could be used to lift thousands of
Canadians out of poverty. There are dierent ways that basic income could be
implemented in Canada, but the results would be the same across the board. A
basic income would lessen suering and give Canadians opportunity by
ensuring that they are not restricted financially. A basic income would ideally
replace all other forms of government welfare. Rather than receiving smaller
amounts of money for various reasons, people would now receive larger
amounts for simply being people. The two dierent models of basic income are
the negative income tax model and the universal demogrant model.
13
The negative income tax model would be implemented through the federal
tax system and consists of three elements.20 There is the benefit level that is the
maximum benefit any person can receive.21 The reduction rate is the amount by
which the benefit is reduced for additional income either above the benefit rate
or a maximum allowable level.22 Finally, the break-even level is the income
level at which the reduction rate is 100%, those above the breakeven level
receive no benefit.23 Essentially this system would work by providing people
with financial assistance up to a certain level depending on what they were
earning. This targets the poor in Canada ensuring they can lift themselves out of
poverty. The targeted nature of this model means only those who fall under a
certain number would benefit. There are pros and cons to this type of model. It
is seen as another type of welfare for poor people and doesn't do anything for
people above the line. This can contribute to the existing negative stigma
towards people dependant on government assistance.
The second model of basic income is the universal demogrant model. This
model would give every citizen a regular payment, regardless of income level.
20
Chandra Pasma and Jim Mulvale. Income Security for All Canadians: Understanding
Guaranteed Income. June 2009. Page 1. http://www.cpj.ca/files/docs/
Income_Security_for_All_Canadians.pdf
21
22
23
14
The money received from the government would not be taxable, but any
additional income would be, typically at a higher level than current levels.24 This
model is seems considerably more expensive because it would even give money
to the richest in Canada. The higher tax rates compensate for this. This model
also attempts to remove the negative stigma attached to receiving government
assistance by giving it to everyone. The universal demogrant model could
actually help the government save money by simplifying the system. Giving
every citizen a guaranteed amount of money is much easier to administer than
the negative income tax model, or even our current system of government
assistance. Within this model, there are dierent variations and
recommendations as it how it could be implemented in Canada. One suggestion
is that people who receive the benefit do not need to work, but need to
participate in something that is of social utility.25 This to me seems like a
reasonable request.
There was an experimental basic income program implemented in
Dauphin, Manitoba in the 1970s. The purpose of the experiment was to

determine if a guaranteed income would cause a disincentive to work, and how
big that disincentive may be. About 30% of the population of Dauphin received
the support from the government and while a final report has never been
24
25
15
released, the results looked promising in favour of a basic income. Overall, the
experiment only had a modest impact on labor markets, with working hours
dropping 1% for men, 3% for married women, and 5% for unmarried women.26
It was mostly new mothers and teenagers who worked less or stopped all
together. This resulted in more high school graduates and better family
structure.27 Overall it seems like the program was a success. Even though it was
40 years ago and society has changed since then, the hope is that the results
would be the same.

In the introduction of his newest book, Robert Reich highlights the
following quote:There are two modes of invading private property; the first, by
which the poor plunder the rich.. sudden and violent; the second, by which the
rich plunder the poor, slow and legal. - John Taylor.28 While it may seem
dramatic or over the top, this quote from 1814 is just a relevant today as it was
then. There is no question that the rich are getting richer and the poor are
getting poorer. This is a big problem and there is no quick fix. To overcome
income inequality, we need to change the way we thing and overhaul the entire
system. A system that works for all of us and not just a few of us is needed.
Basic income would be a great first step in freeing people from the restrictions
that poverty imposes upon them. Increased social awareness is another part of
Robert Longley. Mincome: A Guaranteed Income for All Americans About News. http://
usgovinfo.about.com/od/healthcare/fl/Mincome-A-Guaranteed-Income-for-All-Americans.htm
26
27
Robert Longley. Mincome: A Guaranteed Income for All Americans About News. http://
28
Robert B. Reich Saving Capitalism: For the Many, Not the Few. 2015. Intro.
16
the solution. Questioning and boycotting companies who lay o workers or fail
to pay a living wage while their executive make millions of dollars a year is a way
this could work. Overall, Canada is much better o than many other countries in
the world, but that doesn't mean we should be happy with our situation. We
should always look to make the lives of everyone better. This is where I would
normally tell you about one or two of those lives, but we both know anecdotes
are only worth so much.
17
Bibliography
Commisso, Christina. "A&W Makes Switch to French's Ketchup in Canada." CTVNews. March
29, 2016. Accessed April 13, 2016. http://www.ctvnews.ca/business/a-w-makes-switch-tofrench-s-ketchup-in-canada-1.2836035.
"Canada's Largest Dairy To Shut Down Three Plants." The Hungton Post. March 22, 2016.
http://www.hungtonpost.ca/2016/03/22/saputo-cutting-costs-by-closing-three-canadianplants-impacting-230-employees_n_9524324.html.
"Gross Profit for Wal-Mart." WikiInvest. Accessed April 13, 2016. http://www.wikinvest.com/
stock/Wal-Mart_(WMT)/Data/Gross_Profit.
Jacobs, Ken. "Americans Are Spending $153 Billion a Year to Subsidize McDonalds and WalMart's Low Wage Workers." Washington Post. April 15, 2015. Accessed April 13, 2016. https://
www.washingtonpost.com/posteverything/wp/2015/04/15/we-are-spending-153-billion-a-yearto-subsidize-mcdonalds-and-walmarts-low-wage-workers/.
Lau, Matthew. Income Inequality: A Crisis in Canada or a Political Ploy? The Fraser Institute.
2015. Page 7. https://www.fraserinstitute.org/sites/default/files/income-inequality-csrsummer-2015.pdf
Longley, Robert. Mincome: A Guaranteed Income for All Americans About News. http://
MacKenzie, Hugh. Staying Power: CEO Pay in Canada. Canadian Centre for Policy
MacKenzie, Hugh. Staying Power: CEO Pay in Canada. Canadian Centre for Policy
Pasma, Chandra and Jim Mulvale. Income Security for All Canadians: Understanding
Pasma, Chandra and Jim Mulvale. Income Security for All Canadians: Understanding
Reich, Robert B. Saving Capitalism: For the Many, Not the Few. 2015. Intro.
Reich, Robert B. Saving Capitalism: For the Many, Not the Few. 2015. Page 4.
Reich, Robert B. Saving Capitalism: For the Many, Not the Few. 2015. Page 5.
18
Thompson, Carolyn. "'Bye. Bye. Heinz': French's Ketchup Sells out after Online Post Praising It
and Its Ontario-grown Tomatoes." National Post Bye Bye Heinz Frenchs Ketchup Sells out after
Online Post Praising It and Its Ontario grown tomatoes. February 29, 2016. http://
news.nationalpost.com/news/canada/bye-bye-heinz-frenchs-ketchup-sells-out-after-onlinepost-praising-it-and-its-ontario-grown-tomatoes.
"US Oil Closes up 5 Pct on Surprise Crude Stocks Draw." CNBC. April 06, 2016. http://
www.cnbc.com/2016/04/04/looming-gasoline-glut-pulls-down-crude-oil-prices.html.
Vardi, Moshe. "Are Robots Going to Steal Your Job? Probably." The Guardian. April 07, 2016.

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1

POLS4100 Paper: Income Inequality and Basic Income

Although the election process diers dramatically between the two

According to former Secretary of Labor Robert Reich of the Clinton

according to conditions, rather it is constructed by individuals. If the free market

In the age of maximizing profit for shareholders it seems we read about

to happen when an industry is struggling as much as the oil industry here in

Frenchs swooped in to produce ketchup using Canadian ingredients.5 Due to

Technological advances are great, and any society should strive to

"Gross Profit for Wal-Mart." WikiInvest. http://www.wikinvest.com/stock/Wal-Mart_(WMT)/

Globalization has the honour of contributing tremendously to income

inequality while simultaneously contributing to income equality. Free trade has

Another way that income inequality could be measured is by comparing

Income inequality in Canada may not be as extreme as the inequality that

exists in the United States, but it certainly is a problem. According to a study

wealth in this country. This is an incredibly uneven distribution of wealth. Some

The Broadbent Institute surveyed Canadians about income inequality. This

There is no easy solution to solving the income inequality problem in

The Wealth Gap: Perceptions and Misconceptions in Canada. TheBroadbent Institute.

The Wealth Gap: Perceptions and Misconceptions in Canada. TheBroadbent Institute.

Another possible solution is a guaranteed annual income or a basic

There was an experimental basic income program implemented in

Dauphin, Manitoba in the 1970s. The purpose of the experiment was to

In the introduction of his newest book, Robert Reich highlights the

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