Exploring the Causes and Consequences of Regional Income Inequality in Canada

The recent surge in populist movements sweeping many countries has brought into focus the issue of regional inequality. In this article, we develop a panel data set for Canada that includes information on 284 regions observed at 5-year intervals (from 1981 to 2011) and estimate a series of spatial econometric models to study the causes and consequences of regional inequality. Our results draw attention to the fact that the rise in inequality at the national level has been accompanied by greater cross-regional inequality. Differences in the level of economic development, precariousness of labor market conditions, and socioeconomic factors are among the key drivers of these regional patterns of inequality. We also find that the industrial mix of a region plays an important role in shaping its distribution of income: regions with high concentrations of manufacturing activities typically have lower levels of inequality, whereas regions with high concentrations of tertiary services, arts, and entertainment, as well as knowledge-intensive business services tend to have higher levels of inequality. In terms of the consequences of inequality, the growth/equity trade-off across Canadian regions varies significantly over the short- vs. medium-term horizons. In the short run, our results suggest that inequality is positively related to regional economic growth. This response changes as we move to a medium-term horizon, which suggests that as inequality persists over longer periods of time, it has a negative and significant impact on regional growth trajectories. Panel vector autoregressive models are also used to further explore the direction of causality of the growth-inequality relationship.