More income inequality after recessions

“While many factors came into play during these periods, monetary policy measures aimed at reining in excessive inflation and limiting a further build-up of economic vulnerabilities played a role in these recessions,” the paper finds.

These economic downturns have led to increased inequality, as the incomes of low-income people have been “particularly affected” during these recessions and have not recovered, while those of high-income people have “recovered quickly” and then continued to increase, the study notes.

Over the past 25 years, however, income inequality has improved.

The paper cites Canada’s progressive income tax system and government transfers to households as factors that have reduced inequality in general and limited its rise in more recent recessions.

Nevertheless, concerns about the risk of increasing inequality remain, especially in the wake of the pandemic, which has disproportionately affected women and low-income workers.

Now, as monetary conditions tighten, policymakers’ concerns about rising inequality may resurface. Especially since the measures taken during the pandemic may have stimulated the economy “in a way that has mainly benefited the rich”.

“A combination of the devastating destruction of the livelihoods of large numbers of people around the world and the increase in the fortunes of a few, has fueled a deeper concern,” the document warns.

“This concern focuses on the harmful effects of inequality not only on the health and happiness of individuals, but also on social cohesion and trust in the institutions that serve the citizens of a country. Research has shown that economic growth and stability are negatively affected when inequality increases. »

What is the probability of a collapse?

In a research note, William Robson of the CD Howe Institute examined the possibility that a recession precedes a decline in inflation.

“Just as it takes a hot economy to drive up inflation, it takes a cold economy to drive it down,” says William Robson. This happened before the sudden drops in inflation in 1976, 1983 and 1992, when the consumer price index fell by more than 4.5 percentage points. (Such a fall will be needed to reach 2% inflation by the end of 2024, as the Bank of Canada projects in its latest monetary policy report).

However, if a collapse occurs in the short term, William Robson believes it could be less severe than previous times. He cites three reasons: an improving global economy as supply shocks ease and central banks unwind “monetary and fiscal excesses”; better education on the relationship between monetary policy and inflation; and an increase in expectations of a slowdown.

“If a bleaker outlook prompts caution across the board, the Bank of Canada’s next interest rate hikes will be smaller, and the cycle will end sooner,” concludes William Robson.

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