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Understanding the Wealth Gap: Causes and Consequences

By RBC

PUBLISHED August 25, 2023 • 4 min read

In the mosaic of Canadian society, an increasingly noticeable trend has emerged — the wealth gap. The widening wealth gap is a pressing challenge for individuals, groups, and societies worldwide. Deepening and ongoing wealth disparities stem from various systemic causes, but their consequences affect everyone.

In 1967, Canada was the ninth largest economy in the world; today, it is seventeenth. In terms of income per person, Canada has fallen from third to fifteenth. How does Canada avoid falling further behind in the 21st century?

What’s a wealth gap?

A wealth gap occurs when a disparity exists between the wealth or income of individuals, populations or nations. In simpler terms, it signifies that one group has significantly more — including income, property, investments and savings — while others may struggle to make ends meet.

There are many ways to frame and measure wealth gaps. For example:

In Canada, as in many other OECD (Organization for Economic Co-operation and Development) countries, there’s been an increase in economic inequality over the past several decades.

Why are there a wealth gaps?

There are numerous causes of wealth gaps and just as many consequences. Wealth gaps don’t have a single cause, one of the main reasons they’re tricky to address. However, economists point to multiple contributing factors, including:

  • Access: High-income earners often have access to better education, healthcare, and job opportunities, which can perpetuate the cycle of inequality.

  • Debt: Carrying debt can trap individuals, populations, or even countries into a cycle of poverty. High interest rates may prevent debtors from paying off their loans, and even moderate interest can quickly balloon out of control.

  • Inflation: Inflation is the increase in the cost of goods and services over time, and it’s a normal economic phenomenon. However, when inflation outpaces wages — as is the case for 1.7 billion people — it often becomes a significant problem for individuals and countries.

  • Systemic discrimination: Bias can affect everything from educational opportunities to hiring practices to pay rates. For example, looking at the gender pay gap, there are wealth differences between men, white women, and women of colour, indicating discrimination may play a role.

  • Inter-generational wealth transfer: Wealthier people can build wealth for all of the reasons listed above, and they tend to bequeath wealth to their families, creating additional generations with wealth. Wealth disparities may lead to unequal access to financial security, social mobility, and opportunities for future generations.

These issues occur largely at the macro level. When looking at wealth gaps, there are few ways for individuals to make systemic changes, but this doesn’t mean you’re powerless. Individuals may manage their economic resources through boosting financial literacy, reducing or eliminating debt, and investing.

What are the consequences of the wealth gap?

Wealth gaps, particularly persistent ones, may negatively affect groups and individuals.

  • Bigger gaps:Unaddressed wealth gaps may result in bigger wealth gaps, which means that the problem worsens. For example, according to the IMF (International Monetary Fund), “The top 1% took 38% of all additional wealth accumulated since the mid-1990s, whereas the bottom 50% captured just 2% of it.”

  • Widespread social issues: When individuals cannot afford to house themselves, feed themselves, or take care of their health needs, their quality of life is greatly diminished. Furthermore, individuals with precarious economic positions don’t have the time or resources to invest in anything else, which means that business, art, education and entrepreneurship may suffer.

  • Stress and unrest: Financial insecurity is a major cause of stress, and stress can take a significant physical and emotional toll on people. It’s also a concern for societies. If large population groups face persistent inequality, it may result in social and political unrest.

  • Unequal influence:Groups and individuals with ample financial resources may exert disproportionate influence over policies compared to the rest of the citizenry. This power may change society without the input of all citizens.

Investing to help reduce inequalities

Individuals can take several steps to protect themselves from wealth inequality and work towards financial security. While systemic change is important, personal actions can also make a difference. A good starting point is to invest time in learning about personal finance, budgeting, investing, and wealth-building strategies. Educating yourself about money management is important to empower you to make informed decisions and avoid financial pitfalls.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

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