By Jock Finlayson

The past year witnessed considerable public and media interest in the issue of inequality, as evidenced by the emergence of the “Occupy Wall Street” movement in the United States and its counterparts in several other countries.  A recent study by the Organization for Economic Cooperation and Development (OECD) confirms that income disparities have indeed widened in many affluent nations, including Canada.1  The trend is especially pronounced in the United States; there, the richest per cent of households have almost six times as much income as the bottom per cent.  The ratio in Canada sits at four, putting us in the middle of the inequality pack among advanced economies. And in many OECD countries a rising share of all income seems to be accruing to the top 1 per cent of earners.

Multiple Factors Influence Disparity

Academic research points to a number of factors that have increased inequality and boosted incomes at the upper end of the distribution: globalization, the impact of technological change, competition from low-wage emerging economies, and (until recently) rapid growth of the financial sector.  Fast-climbing compensation for chief executives, professional athletes, entertainers, and some successful business owners has also played a role in driving income gains at the very top.  But the most important contributor to greater earnings inequality is increases in what economists refer to as “the education wage premium” – the economic returns to individuals who possess one or more university degrees (or other high-value work-related credentials).  Continued growth in the demand for better-educated workers has noticeably raised earnings for people in the top 25-30 per cent of the income distribution.

Another phenomenon that has fostered larger gaps in household (as opposed to individual) income is “assortative mating.” This awkward term captures the realty that marriages today increasingly occur among individuals drawn from the same socio-economic strata.  Thus, people with university degrees are more apt to marry other degree-holders than to wed someone with lesser educational qualifications.  It is striking how often one encounters couples where both spouses are lawyers, physicians, accountants, finance professionals, professors, or MBAs.  Combined with the fact that a large majority of working-age women are now full participants in the labor force, “assortative mating” has significantly accentuated divergences in household income.

Employment Polarization Widens Gap

Also affecting income inequality are other forces that are impinging on the quality of jobs and recasting the earnings distribution. One key trend, operating on the “demand side” of the labor market, is employment polarization.  Across many advanced economies, more job opportunities are tending to concentrate at the two ends of the skills spectrum: skill-intensive positions that demand high-level cognitive abilities and formal educational credentials, and a plethora of less skilled jobs that offer substantially lower compensation.

American economist David Autor has explored this topic in detail.2 Looking at patterns of job creation and employee compensation in the US, he finds three broad groups of occupations.  The first consists of managerial, professional and technical occupations that require several years of post-secondary education and pay well above-average wages/salaries.  Most households in the top 10 per cent of the income distribution have one and sometimes two members in these kinds of occupations.

The second group is made up of what Autor refers to as “middle-educated, middle-paid” occupations; these include sales, office, production, and repair occupations along with fabricators and operators.  Workers in these fields commonly have some tertiary education, but not usually a university degree.  In the past, such occupations formed part of the bedrock of the American middle class and often provided a pathway to upward mobility.

A final set of occupations spans a diverse mix of service-related jobs in which employees generally don’t have any formal post-secondary qualifications. Workers in many of these jobs are engaged in performing manual or other “in-person” tasks that can’t easily be replaced with technology, or out-sourced to jurisdictions with lower labor costs.  Examples are food preparation, cleaning, home and building maintenance, basic retail services, and a wide range of personal care services.

Occupational Grouping Insights

Autor’s research shows that job creation differs across the three categories of occupations.  Since the early 1980s, employment in the US has grown briskly among both managerial, professional and technical occupations, as well as in many relatively lower-skilled service positions. But the picture is different for middle-educated, middle-paid occupations. Here, employment gains have lagged the economy-wide average and actually trended down over time.  And these shifts in job creation among occupational groupings are expected to continue for the rest of the decade.3

Autor argues that an important consequence of “rising demand for both highly educated workers…and less educated workers performing manual or service tasks is the partial hollowing out or polarization of employment opportunities.”  If he is right, we can assume that similar occupational dynamics are unfolding in Canada.  Looking ahead, this may well herald a “partial hollowing out” of middle-income employment opportunities in our own labor market, a development that would serve to magnify concerns over income and earnings inequality.

Jock Finlayson is the executive vice-president of the Business Council of BC.

1 Organization for Economic Cooperation and Development, Growing Unequal? Income Distribution and Poverty in OECD Countries (Paris: OECD, 2008).

2 David Autor, “US Labor Market Challenges Over the Long Term,” October 2010, available at: http://econ-www.mit.edu/faculty/dautor.

3 US Bureau of Labor Statistics, Occupational Outlook Handbook, 2010-11 edition, available at: www.bls.gov/oco.

(PeopleTalk: Spring 2012)