There are rising concerns about income and wealth inequality in liberal democracies as populist backlashes and intensifying incidents of civil unrest emerge throughout the western world. And with the economic hardship wrought by the pandemic, potential for increasing inflation, and a housing affordability crisis looming in Canada, the problem grows more pressing than ever.
Looking for insight, Vincent Geloso of George Mason University and James Dean of West Virginia University have released a working paper that studies whether economic freedom is connected to income mobility, because while economic freedom is robustly associated with income growth, to what extent does this association extend to the poorest in a society? It is, after all, they who are most immediately affected by inequality.
To answer this question Geloso and Dean examine Canada’s longitudinal cohorts of income mobility between 1982 and 2018. They lay out their conclusion:
“We find that economic freedom, as measured by the Fraser Institute’s Economic Freedom of North America (EFNA) index, is positively associated with multiple measures of income mobility for people in the lowest income deciles, including a) absolute income gain; b) the percentage of people with rising income; and c) average decile mobility. For the overall population, economic freedom has weaker effects.”
What does this mean? This implies, they write, that labour market freedom is the most important driver of income mobility, and is strongly associated with greater upward relative mobility for both the poorest and the aggregate population.
Overall then, labour market regulations are not just harmful to the economy as a whole, they specifically perpetuate income inequality because, by restricting entry, they may prop up the income of higher-income groups at the expense of the mobility of lower income groups.
