Income Inequality is Hurting the Economy

History is repeating itself and we have yet to learn from it. Our society is being pulled apart. Growing income inequality has been on the rise for the past 20 years and we are now in the midst of a downward spiral of the middle class. This is a contributing factor to our country’s financial hardship.

The Conference Board of Canada recently confirmed the very wealthy have increased their share of total national income in the last 15 years while the low and middle-income earners lost their fair share. This uneven distribution of wealth has led to an economy that is out of balance.

We can see history repeating itself with our economy favouring the rich and harming middle class workers. As Robert Reich explains, back in the early 20^th century Henry Ford figured out that if he paid his employees enough money, they would become consumers. Ford was criticized for this move; some even called it an economic crime to pay his workers three times the going rate. His strategy paid off; Ford’s workers were able to buy the products he produced and his profits doubled. Other employers followed suit. When the economy crashed in late 20s, employers reverted back to the old ways of doing business. Any gains made during the great economic downturn went to corporations. Only the rich got richer. The middle class and working poor went further in debt.

Today, we see the same pattern. Corporations and governments are showing profit or reducing debt ratios by shedding the labour force and reducing wages. This has created a wage gap that has had a role in the recent financial crisis, as it did during the Great Recession.

When putting income inequality in today’s context, we’ve seen a growing trend of offshore jobs and anti-labour laws. Michigan State is the proven case that right to work is not a job creator. Since right to work legislation was passed last March 2012, underemployment and unemployment have increased.

Sears Canada and the Royal Bank of Canada are recent examples of multinational corporations moving jobs overseas and walking out on our communities to save money in labour costs. They are vacating our communities to exploit foreign workers and avoid social commitments. The United States and Colombia free trade agreement is a textbook example of how trade deals have facilitated job migration and exploitation of the workforce in developing countries. Issues of inequality are moving from one shore to another. Recent trade agreements, like the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), must encompass labour protection provisions to address offshoring and evasion of social commitment. Our governments must impel firms to be socially responsible because these forms of wealth-sharing evasion damage our communities. It’s only a matter of time before the house of cards falls.

Concentration of income among an elite few remains a problem for the economy both at home and abroad. To have a balanced economy that works for everyone, we need to understand the problem. As Owen Jones, a British journalist and columnist explains at the Chartered Institute of Public Finance & Accountancy Conference, our economy needs people who can afford to purchase the goods and services we create. We need the consumer demand back in the economy. Current policies are not working. Austerity leads to fear amongst the working class; people are afraid they will lose their jobs, and therefore stop spending money which leads to lower tax revenues. Making cuts to wages and other benefits will not result in a stronger economy.

Instead of trying to weaken the collective voice of the middle-class worker, governments need to bring balance back to the economy. This is meant to be a government for the people. We must stand together and give ourselves a voice and push our government to be more innovative in striking this balance.

Milt Isaacs, CMA, CPFA
President, Association of Canadian Financial Officers