Canada has never embraced economic inequality to the extent it has over the past few years. Statistics Canada (Stat Can) data shows the household income gap continued to widen in 2024. A result of policies that favor one group at the expense of another, the income gap indicates rising household inequality. Rising income inequality has significant social liabilities, eroding quality of life and leading to increased political polarization. Canada’s income gap is now at the widest level in modern history, indicating that households face unprecedented economic inequality. That’s a big liability for the whole country.
The Income Gap & Its Role In Political, Economic, and Social Stability
The income gap is the difference in disposable income earned by the top and bottom 40% of households. Expressed in percentage points, a shrinking income gap means a wider Middle Class, indicating a thriving country. A widening income gap means a shrinking Middle Class, increased inequality, and a more divided society.
Even the top-earning households should care about shrinking the income gap. A smaller gap is a sign of a thriving economy, and a robust Middle Class. It’s a strong indicator of well-distributed economic opportunity, demonstrating solid upward mobility. Those who work hard are rewarded, a sign of a country that has fair and well-functioning institutions. Progress only occurs when policies are balanced, and a country is prospering.
A widening income gap is also a problem for everyone, even those at the top of the food chain. As the income gap widens, inequality becomes more prevalent and economic opportunity narrows. It’s a big red flag that indicates policies are slanted towards one demographic at the expense of another. This leads to increased political polarization and distrust of institutions, undermining a country’s democratic pillars.
All of this makes a lot of sense. When a country is operating well, few people pay attention to politics—they just work. People can focus on capturing the opportunities that are available. If upward mobility disappears, a country feels “rigged” and fewer people see any reward for hard work. Brain drain is an obvious outcome, when the country’s best & brightest look abroad for opportunities. A less obvious outcome is failure to motivate future generations who “don’t see the point” of hard work. That turns an economic liability into a social liability that threatens our long-term prosperity.
Canada Has Never Had A Larger Income Gap, Worst Equality In Modern History
Canada’s income gap, which Stat Can defines as the percentage point gap between the top and bottom 40% of households.
Source: Stat Can; Better Dwelling.
There’s no way to sugar coat this one—Canada is heading in the wrong direction. The income gap hit 47.1 points in 2024, the highest level on record. Since hitting a record low in 2020, the income gap has added 7.4 points. In the 25 years of data the agency provides, the country has never been this polarized and suffered from such inequality.
At first glance, most people assume the record low in 2020 was due to low rates. Heck, even Stat Can made the unqualified statement today that low rates benefit low income households the most. However, the record low was due to the a temporary (and not repeatable) issue related to government transfers.
When households had their ability to work throttled, government transfers like CERB were rolled out. Since the same amount was used for all households, those at the bottom of the distribution made more than they did working. Once the government transfers ended, the income disparity returned. The low rate environment amplified the inequality on the back end, as all research indicated it would.
Low Rates Amplify Wealth Inequality, & Thus Income Inequality
Despite what local politicians seem to think, low rates exacerbate wealth inequality, impacting income. Central bank researchers found that each low rate shock transferred a greater share of total wealth to the wealthiest households. It’s easy to understand why, since low rates provide more credit leverage. Low income households use the leverage to finance necessities, and wealthy ones to buy income-generating assets.
The narrative that low rates and credit leverage improve affordability is a common misconception (or deception). Despite the Governor’s contrary statements, Bank of Canada (BoC) researchers found lower rates did not improve affordability. Their research revealed that leverage helped home prices rise more aggressively, as the market adjusted to absorb increased leverage.
It was more recently reiterated by researchers at the US Federal Reserve. Following record home price growth, rising rates were blamed for eroding affordability. They argue the aggressive price growth would have further reduced affordability, requiring sharper rate hikes at a later date.
Even more recently, the BoC Deputy Governor made a statement along similar lines. She advised policymakers against “mortgage tinkering” plans, warning the cheap leverage would inflate prices even if it produced no additional demand. They went ahead anyway.
What was that part about rising inequality resulting from skewed policies that can destabilize an economy? It may be a key point to stew on here.