Poverty not the same as inequality

The Fraser Institute has published substantial work on both poverty and inequality, culminating in the major volume Towards a Better Understanding of Income Inequality in Canada (2017). A number of essays and commentaries have since been published updating particular aspects of this work. This is the first essay in a series updating many essays in this volume including how we measure income, complexities in understanding income over time, and different aspects of inequality. The authors want to recognize both the original authors in the 2017 volume and Christopher Sarlo more generally for his three-decades-plus work on issues related to poverty and inequality. Moreover, Sarlo was instrumental in helping with early rounds of the essays and data work on measuring income inequality for this series.

This first essay explores conceptual differences between poverty and inequality, which too often are conflated with one another. Poverty is a condition of insufficiency. Economic inequality refers to differences or gaps in economic wellbeing. The degree of insufficiency required to define poverty has been the subject of much debate. Some prefer to understand the condition of poverty as a rather serious level of deprivation, while others prefer to define poverty as a condition of relative deprivation—that is, having less than most others in the community independent of your actual living standard.

The main issue to understand is that poverty, traditionally defined and avoiding relative comparisons, is largely about the lack of some level of basic necessities. We can certainly discuss what constitutes basic necessities, but the critical focus is understanding and measuring the degree to which individuals and/or families are able to secure these necessities. Our interest in this specific essay is to try to explain the distinction between poverty and inequality in a straightforward non-technical way.

Let’s imagine a wealthy community like West Vancouver or Rosedale in Toronto. In these communities, there are millionaires, multi-millionaires and even billionaires. The observed levels of inequality in income are substantial but almost no poverty. Next, imagine more egalitarian communities where almost everyone lives within a narrow band around the poverty line. Here, we have lots of poverty but not much inequality.

The distinction matters principally because problems associated with poverty are too frequently misidentified as connected to economic inequality. For example, Harvard philosopher Thomas Scanlon, a long-time critic of inequality, has stated in a 2014 paper, “Economic inequality makes it difficult, if not impossible, to create equality of opportunity. Income inequality means that some children will enter the workforce much better prepared than others. And people with few assets find it harder to access the first small steps to larger opportunities, such as a loan to start a business or pay for an advanced degree.” The reader will be understandably confused. The lack of opportunity and the inability to access loans or afford educational opportunities is due to poverty, not inequality. Again, in West Vancouver there’s substantial economic inequality but very little inability to access opportunities for advancement.

In the Canadian context, scholars Yassin, Petit and Abraham in their 2024 paper, The Troubling Rise of Income and Wealth Inequality in Canada, refer to inequality statistics then cite instances of food

insecurity, material deprivation and “tough choices about which bills to pay” as the consequences. Inequality per se does not imply anything about poverty. Further, they also claim that income inequality is associated with poor health outcomes (the “poverty effect”) and declining trust in society but they do not provide any citations. Their solution, predictably, is greater redistribution, a wealth tax, and easier access to social programs. Again, the “poverty” effect helps explain many of the concerns that are incorrectly attributed to economic inequality. The following graphic illustrates this important distinction.

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The graph shows two income distributions. Distribution “A” is the distribution clustered around the poverty line. The distribution is narrow, indicating that most people in that community have similarly low incomes. Distribution “B” displays the income of a wealthier community with very few poor people but a high level of inequality with a mix of millionaires and billionaires—perhaps like West Vancouver.

It’s difficult to have genuine and productive conversations and even debates about economic inequality when poverty and inequality are conflated. Poverty is a serious issue and should be understood and addressed as a condition of insufficiency. The failure to make this distinction has been a key barrier to effectively reducing poverty, so understanding the differences between poverty and inequality is critical.

This is the first essay of a five-part series on income inequality, which will appear on the Fraser Institute blog.