Natural Resources, Living Standards and Inequality

Kevin Milligan had an op-ed in the Globe and Mail a few days ago drawing the link between natural resource development, middle class incomes and inequality.  The point essentially was: “Without income derived from the resource boom, Canadian inequality and the well-being of the Canadian middle class would be much worse than we’ve experienced.”  The point was being made with reference to the current pipeline debate and the consequences of erecting barriers to the transportation of resources to market.  Erecting barriers in the end would result in less resource development and by extension fewer good jobs that would diminish “the income source that has best shielded the Canadian middle class from the harsh economic forces that are increasing inequality in other countries. For Canadians concerned with inequality, the equalizing effect of resource development on our economy is too strong to ignore.”

A couple of points I would like to make here.  First, I agree that resource development has indeed been crucial to our standard of living in this country and it is a fact that seems increasingly underappreciated by Canadians.  When I talk about the resource sector to my economics students I like to depict the Canadian economy as a large leafy deciduous tree.  From a distance you see the many branches and leaves of the economy but all of it is supported by a slender trunk – the natural resource sector. 

Queen’s University economic historian Ian Keay finds that the exploitation of Canada’s natural resources during the 20^th century made direct and indirect contributions to the size and efficiency of the Canadian economy and had a substantial positive impact on the level of real per capita GDP, contributing about 20 per cent. In other words, without a resource sector there would be a 20 per cent national pay cut. According to Natural Resources Canada, in 2014 Canada’s natural resources accounted for nearly one-fifth of Canada’s nominal GDP. Natural resource companies generate nearly half of total non-residential capital investment in Canada accounting for a key chunk of capital.  The resource sector is also vital to the transportation sector as natural resource products account for more than two thirds of rail and marine shipments in Canada. So, the long and short is: natural resources have been important to our standard of living and will continue to be so.

Second, I am however less certain on the impact of natural resources on mitigating economic inequality. While they probably have been a factor, I would have to think any impact of natural resource development on inequality must be considered in conjunction with other determinants of inequality.  I have been doing some work on historical wealth inequality and have a short book forthcoming dealing with wealth inequality in Canada, the United States and the United Kingdom.  Here is a preview below of one of the charts which I have constructed for the book.  The figure is a LOWESS smooth of the wealth shares of the top 1 percent for the three countries created from an assortment of available estimates over the period 1668 to 2013.

Based on these estimates and measures of wealth inequality, one can see that Canada generally is characterized by less wealth inequality.  You can argue that since Canada is a more resource intensive economy than the United States or the United Kingdom, then perhaps there is a correlation between resource intensiveness and wealth inequality.  Moreover, even the United States and the United Kingdom are marked by less inequality in the earlier periods of their development when they were more resource or agriculturally intensive economies.  With industrialization, wealth inequality – as measured by the wealth share of the top 1 percent –increased in all three countries.

However, there are caveats here.  The United States was also a fairly resource intensive economy well into the twentieth century with raw materials and foods as key exports into the 1940s and 1950s as well as a high natural resource content for its manufacturing exports prior to World War II.  Yet the nineteenth century saw a rise in US wealth inequality (also note the rebound after the mid twentieth century). Then there is the United Kingdom which has seen a decline of the wealth share of its top 1 percent moving into the twentieth century to the point where it is comparable to Canada’s and yet one suspects that there has not been a major shift in the resource intensity of its economy. It did however have a fairly steep system of estate taxation in the early twentieth century.

This suggests that there are other factors at play also in affecting economic inequality aside from natural resource intensity.  Public sector spending and employment, the ownership of natural resources (which in Canada has emphasized public ownership as opposed to private in the United States), unionization rates (higher in Canada than the United States), home ownership and housing policies, tax systems and particularly systems of wealth and estate taxation are all part of the mix in what has affected economic inequality over the long term.  I think we should resist the temptation to ascribe the determinants of wealth inequality to single causal factors even if it can be helpful in getting a pipeline approved.

Comments

[jorgensen]

Where I live forestry workers earn good incomes with relatively little education. The private mill owners are wealthy but the reality is that the workers derive more benefit from the owners wealth than the owners do.

[rsj]

Resource extraction is one of those services that can't be offshored. It is also hard to evade taxation.

[Jacques René Giguère]

Never forget that the guys at the top of the distribution always lived elsewhere, from the HBC in London to the oil companies in Houston.
Canada always had equality among the peons...