Wealth inequality in Canada no problem, says economics expert

Wealth inequality in Canada no problem, says economics expert

Wealth inequality in Canada no problem, says economics expert

On the face of it, a country where a small group of people own a disproportionate amount of its wealth has a problem. So a recent study from the Organization for Economic Co-operation and Development (OECD) that found unequal distribution of wealth in North America should sound concerning.

But according to Chris Sarlo, a professor of economics at Nipissing University, a lot of media coverage of wealth inequality is much ado about nothing.

“Wealth is defined as ‘net worth’ and is essentially a household’s assets minus its liabilities,” Sarlo wrote in a recent article. “[The OECD study] shows that among member countries … the top 10 per cent of households own about 50 per cent of the wealth and the bottom 40 per cent own almost nothing (the average is below five per cent).”

He noted that immediately after the top-ranking US, the OECD found that Denmark, Norway, and the Netherlands had high levels of wealth inequality. “Indeed, in each of those three countries, the bottom 40% actually has negative wealth – they owe more than their assets,” he said.

Referring to other studies, Sarlo said that Sweden had a similarly high level of wealth inequality. While it might sound surprising that the bottom 40% of households in any country, particularly the “Scandinavian paradises,” have no wealth, he said it could easily be explained by taking age into account.

“Age is the dominant explanation for differentials in wealth,” he said. A 25-year-old entering his first job, he pointed out, would likely have no wealth; in fact, they would likely be in the negative if they had student debt. After forty years of repaying debt and accumulating wealth in savings accounts, home equity, and financial assets, the same person will have substantial wealth.

“Most people start their working lives in the bottom quintile or decile of wealth and end up in a top grouping around retirement age,” he continued. Citing a Fraser Institute study he authored, which analyzed household wealth data from a 2012 Statistics Canada survey, he said the youngest grouping of respondents had an average net worth of only $55,000, while those around retirement age averaged nearly $1 million.

“My analysis of this pattern showed that between 80% and 87% of Canadian wealth inequality is due to age (the life-cycle effect),” he said, adding that the pattern is predictable for society despite the difficulties in life that cause some to deviate from it. “With the recent OECD study, the larger negative values among the bottom 40% in some northern European countries is due to higher home prices in recent years and because younger families are consequently carrying a heavier debt burden.”

While the authors of the 69-page OECD report mentioned age as a factor, Sarlo said, they buried the explanation in one small paragraph that was “lost in the plethora of attention given to the statistics on wealth inequality.”

 

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