Boosting Income Mobility through Economic Liberty in Quebec
Research Paper showing how the province’s current fiscal and regulatory environment hampers individuals’ ability to climb the economic ladder, eroding both the incentives and the opportunities necessary for economic advancement
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This Research Paper was prepared by Gabriel Giguère, Senior Policy Analyst at the MEI, and Vincent Geloso, assistant professor of economics at George Mason University and Senior Economist at the MEI.
Highlights
People’s ability to climb the income ladder over time is the mark of a dynamic society. Through personal effort, individuals must be able to climb up the ladder and improve their lot. In economically freer nations, individuals have fewer obstacles preventing their ascent, and with lower taxation, they reap greater rewards for their efforts. In this Paper, we examine various key concepts that help explain what enables individuals to ameliorate their positions, using recent data and studies that offer a clear picture of the situation in Quebec.
Chapter 1 – Economic Freedom in Quebec and the Rest of Canada
- Economic freedom is the ability of individuals to make their own economic decisions without government interference. It emphasizes voluntary exchange and autonomy in the marketplace.
- Alberta ranks as the most economically free province, followed by Manitoba and Ontario, while Quebec ranks as the least free province. Historically, Quebec has consistently been one of the least economically free provinces.
- Total government spending in Quebec as a percentage of GDP in 2022 was nearly 10 percentage points higher than in Ontario, 14 percentage points higher than in British Columbia, and nearly double that of Alberta.
- The tax burden in Quebec was 38.9% of GDP in 2022, the highest tax burden in all of Canada. The higher tax burden on Quebecers reduces the amount of money available to individuals to spend or invest as they please.
- Over 35% of Quebec’s workforce is unionized, compared to roughly 29% in British Columbia, and below 25% in Ontario and Alberta. Quebec’s high level of unionization negatively impacts its economic freedom, limiting employers’ ability to adjust their workforce to market conditions, among other restrictions.
- If certain other important components of economic freedom (like occupational licensing, housing regulations, interprovincial trade barriers, and industry-level regulations) could be included, Quebec’s score of 2.67, already bad, would actually worsen.
Chapter 2 – Income Mobility—What Is It and How Much Is There in Quebec?
- Absolute mobility refers to whether a person experiences improvements in living standards with respect to a given reference point, such as the level of income of one’s parents.
- Relative mobility indicates whether an individual attains a higher social rank, which is to say, how much a person rises on the income ladder.
- When large segments of the population feel that the economic system allows them, in principle, to rise to the top, social cohesion is improved.
- Improvements in absolute income mobility tend to generate long-run improvements in relative mobility because the former implies the presence of economic growth, which matters far more for people at the bottom of the income ladder.
- Canada has long exhibited high levels of income mobility. However, this conceals large regional differences, notably Quebec’s relatively poor performance.
- Before the tax man intervenes, Quebec is seen to have the second-highest social mobility of all Canadian provinces, trailing only Alberta. When family income is taxed, this dynamic is reversed, pushing Quebec back down to the middle of the pack and undoing a great deal of its social mobility.
Chapter 3 – The Connection Between Economic Freedom and Income Mobility
- The absence of disincentives or barriers that impede efforts at upward mobility among lower income groups will increase both relative and absolute income mobility.
- High tax burdens may discourage people from working, thus preventing the acquisition of on-the-job experience that would allow them to climb the ladder.
- The sum of the direct and indirect effects of economic freedom—especially the property rights and regulation components—far outweighed the effects of inequality.
- If Quebec had been as economically free as Alberta, it would have reversed the decline in income mobility it experienced from 1982 to 2018.
- Government spending in the form of transfers to individuals had no effect on the ability to exit poverty permanently.
- In economically free environments, the persistence of income status through inheritance at birth is massively eroded.
Chapter 4 – Public Policy Recommendations for Better Income Mobility in Quebec
- Recommendation 1: Set up an expenditure review committee with the aim of drastically reducing public spending, in particular by downsizing the public sector.
- Recommendation 2: Reduce taxes significantly, especially payroll taxes for employers, and the corporate income tax.
- Recommendation 3: Initiate a process to make zoning more flexible, to allow greater population density and more versatile use of land.
- Recommendation 4: Reduce occupational licensing significantly and replace it with voluntary/optional certification.
- Recommendation 5: Eliminate barriers to interprovincial trade to match Alberta, which has only around 1/6 as many barriers as Quebec.
Quebec ranks poorly in terms of economic freedom, coming last among Canadian provinces. The current fiscal and regulatory environment hampers individuals’ ability to climb the economic ladder, as high taxes and rigid regulations erode both the incentives and the opportunities necessary for economic advancement. Political decision-makers must ensure that a regulatory framework is put in place to encourage income mobility among the less well-off members of society.
Introduction
The possibility of doing better than previous generations is a defining characteristic of modern Western societies, and Quebec is no exception to this. People’s ability to climb the income ladder over time is the mark of a dynamic society, and social mobility (both across and within generations) is one of the clearest indicators that a society is prospering and creating opportunities for all. Conveniently for us, income mobility serves as a very good indicator of social mobility.
Through personal effort, individuals must be able to climb up the ladder and improve their lot. Without this social elevator, those at the bottom of the income scale are forced to live their entire lives there, without any real opportunity for improvement. If working hard, developing skills, and innovating are not perceived as generating upward motion on the income ladder, a society will likely face greater socio-political instability. Thus, a good set of economic policies will promote effort, entrepreneurship, and innovation as ways to move up.
This largely explains the link between a country’s income mobility and its level of economic freedom. Economic freedom measures the degree of government involvement in economic affairs via taxation, regulation, and barriers to entrepreneurship and trade. In economically freer nations, individuals have fewer obstacles preventing their ascent, and with lower taxation, they reap greater rewards for their efforts toward this goal.
In economically freer nations, individuals have fewer obstacles preventing their ascent, and with lower taxation, they reap greater rewards for their efforts.
This link is not surprising, and it manifests in various ways. Consider, for example, the level of taxation imposed by the current government of Quebec. The more of their income that is confiscated by government, the less they have available to employ toward improving their lot. In concrete terms, when tax pressure is high in a given area, the level of entrepreneurship is lower than it would be if it were lower.
In this Research Paper, we examine various key concepts that help explain what enables individuals to ameliorate their positions, using recent data and studies that offer a clear picture of the situation in Quebec.
Because there is no generalized income mobility without economic freedom, in Chapter 1 we look at economic freedom and its different indicators, comparing Quebec with other Canadian provinces. In Chapter 2, we study both inter- and intra-generational social mobility in Quebec and compare it against the other Canadian provinces. We also examine in more detail how Quebec has performed historically in terms of social mobility in general, and income mobility in particular. In Chapter 3, we analyze the links between these two interrelated concepts. Finally, in Chapter 4 we formulate specific public policy recommendations to enable Quebecers to benefit from greater economic freedom, and thereby enjoy greater social and income mobility.