Public Policies, Social Institutions, and Earnings Inequality: Canada and the United States, 1970–1995

Abstract

Economists now agree that, since the early 1970s, there has been an unprecedented surge in income inequality and a polarization of earnings in the United States. Although employment growth in the United States has been strong over the past twenty years, especially when contrasted with Europe, virtually all U.S. studies conclude that the low-wage share of total employment has expanded since the 1970s, even among workers who work year-round and full-time, and there has been a polarization of earnings: more high- and low-wage jobs, and a shrinking middle class. A key indicator of living standards, real wages, has fallen since 1973. The Canadian labor market has evolved somewhat differently since the early 1970s. As has been the case in the United States, real wages in Canada have declined since the mid-1970s, particularly for male workers. Employment growth in Canada, while not quite as robust as in the United States since the 1970s, has exceeded Europe's, although Canada's underlying unemployment rate by the mid-1990s more resembled Europe's than that of the United States. Earnings polarization in Canada, however, has not been nearly as pronounced as it has been in the United States. In fact, there was a marked decline in the low-wage component of the wage structure in Canada's largest provinces during the 1970s, and for Canada as a whole the earnings distribution has been relatively stable since 1980. A comparative analysis of wage trends in Canada and the United States offers an excellent natural laboratory in which to explore the relative influence of factors such as economic restructuring or differing labor market institutions on inequality and overall living standards. Canada and the United States inhabit geographically proximate, increasingly interconnected economic space, with similar industrial and occupational structures and labor force characteristics. Thus we might plausibly expect similar impacts of trends such as global economic integration, deindustrialization, the shift to a service economy, corporate downsizing, and the introduction of new production technologies on the structure of earnings (Card and Freeman 1993a). Yet through the mid-1990s, the wage structure in Canada has remained markedly less polarized than in the United States, leading some to attribute this variation to differences in Canadian and U.S. public policies and labor market institutions (Card and Freeman 1993; Levine 1995). Compared to the United States, Canadian labor markets have historically featured a more generous array of income maintenance programs and other worker benefits, higher rates of unionization, and higher minimum wages. To what extent have these differences permitted Canada to avoid the wage polarization experienced in the United States since the 1970s? On the other hand, has a cost for Canada of these policies and institutions been a version of what some call Eurosclerosis: persistently high unemployment caused by untenably high wages and costly social programs that undercut the competitiveness of firms and limit their ability to hire workers? In short, does the U.S.-Canada comparison reveal, as some claim U.S.-Europe comparisons do, a modern economic tradeoff in which rising inequality and wage disparities are unavoidable prices to be paid for job creation in a competitive, global economy (OECD 1994)? Finally, in the wake of the growing Americanization of Canadian public policy and greater U.S.-Canada trade linkages since the late 1980s, are there signs that U.S.-style wage disparities have begun to surface in Canada? This article is divided into four sections. The first two present evidence on inequality and wage polarization in the United States and Canada since the early 1970s. In section three, I examine more closely differences in public policies and labor market institutions in the two countries that may account for variations in patterns of earnings polarization. Finally, I conclude with a discussion of the policy implications of the U. …