A Study of Economic Reform: The Case of New Zealand,, edited Brian Silverstone, Alan Bollard, and Ralph Lattimore, (North Holland Books: 1996) pp.101-138.
Note: This item was so big it is in two parts. Income Distribution: Part I
Keywords: Distributional Economics;
6.4 Benefit, Taxes, and the Reforms
In the period up to 1990, the government faced severe fiscal stress. As a result the burden of taxation rose and the real value of social assistance per person was not markedly increased. Moreover the burden of taxation was shifted towards low income earners, who experienced much larger tax rises than those further up the scale, while that on the richest fell. Thus the taxation system became less progressive. At the same time, in terms of the measure used here, beneficiary real incomes were not undercut, or perhaps only a little in 1989 and 1990. The difficulty of drawing conclusions is such a lot happening in terms of detailed changes, that it is difficult to trace each effect. Alternately we can look at their overall impact on incomes.
6.5 Personal Disposable Income
There is no data on personal disposable income. It would be quite hard to calculate because benefit eligibility is sometimes family circumstances related, including family support, some exemptions (most of which no longer apply), and a single benefit which goes to an individual and spouse, with or without children. Table 6 gave a “total personal income” series for three census years. This measure adds benefit income to market income, but does not deduct tax to give personal disposable income.
6.6 Maori Incomes in the 1980s
We can report here on trends in Maori total income relativities in the 1980s. (Total income is market income plus benefit income before tax.) Unfortunately the only reliable data source, the population census, uses different definitions in each census. Table 8 reports the average income of Maori over the age of 15, by gender, relative to the income of the total equivalent population. Not unexpectedly, the Maori relativities are much lower than the non-Maori, although Maori women are closer to the female average, than Maori men are to the male average.
|NEW ZEALAND MAORI AVERAGE INCOMEPercentage of Total Population Average|
|Half or More Degree of Maori Origin||74.4||75.4|
|Solely Maori Origin||76.9||85.6|
|Maori Origin or Descent||78.5||86.7|
|Maori Sole Ethnic Group||69.1||82.6|
|Maori Ethnic Group||70.9||83.4|
Source: Population Census, 1981, 1986. 1991.
Notes: Total income (market income plus social security
The Maori descendants relativity for 1981 has been estimated by
chain linking market income relativities with total income relativities.
Comparing the three definitions involving Maori descent or ancestry we observe that Maori male income relativities were falling over the period, while Maori female relativities were rising. It has not been possible to assess whether this is an age effect, although that seems unlikely. It is likely this is an unemployment effect, but it is not possible to check this with a reasonably consistent definition of maoriness.
7. HOUSEHOLD DISPOSABLE INCOMES
The most important change to the data base on the income distribution since Easton (1983) has been the development of a strong income side measurement in the Household Expenditure and Income Survey (HEIS), the ability to manipulate this data through the ASSET model, and the possibility of making comparisons over time. The standard means of comparison is “equivalent disposable income”. Disposable income is market income adjusted for benefits and direct taxes (to give “total income”). Incomes are further adjusted for household composition, to take account of the economies of scale of living in a larger households, and the fact that children generally do not require the same income as adults to attain the same standard of living. (In simple terms it might be thought as putting household income on a per capita basis, but allowing for economies of scale and children not being full adults.)
Mowbray (1993) provides data on equivalent household incomes between 1981/2 and 1990/1, which she has updated to 1992/3. (The adjustment for household composition is based on the Jensen Household Equivalence Scale (1988). The scale may over estimate the strength of economies of scale, and thus under estimate the effective incomes of small households relative to large ones (Easton 1995).) Figure 8 shows the average income of each household decile as a proportion of the mean income for the year. The following are discernable patterns in order of how obvious they are.
– The bottom decile shows some fluctuation which may be around a flat trend. This probably reflects the sampling variability arising from the small number of household which report substantial losses.
– The change at in the top decile is more systematic, with a near flat trend to 1987/8, and then the share rising from an average share of 20.4 percent (i.e about double the average) up to 1987/8 to an average share of 24.5 percent in the four years from 1988/9. This represents an increase in the share by one fifth.
– The third change is there is a definite weakening in the other deciles (excluding the second upper quintile) after 1988.
Thus after 1987/8 there was an increase in inequality of equivalent disposable income.
Perhaps this is not surprising given the substantial cuts in top tax income rates which occurred in October 1988, while tax concessions were withdrawn on all incomes. What is surprising is that we cannot observe any major effects from the October 1986 cuts. Probably, while the cuts were as deep at the top (from 66 to 48 percent, in comparison to the 48 to 33 percent in 1988), they were not as broad. The October 1982 cuts do not appear to have affected the household distribution markedly either. If there had been data for the years immediately after the earlier tax changes an effect might have been observable, but two years later the cuts had been offset by the fiscal drag.
However the tax cuts were not the only cause of the increased inequality. It can be shown there was a relative decrease in the incomes of those in the second to bottom quintile after 1988, which does not seem to be due to either tax nor benefit changes. The most likely explanation is that it reflects some deterioration in the labour market. (Easton 1994).
A third major effect on the income distribution was the benefit tax cuts of 1991, discussed in section 9. Note that the effect mentioned in the preceding paragraph occurs before these cuts, as illustrated in Figure 8.
Figure 9 shows the Mowbray estimates for households which have at least one Maori or one Pacific Islander in them, or of “other ethnicity” (mainly Pakeha/European). The figures bounce around a bit, more so than those in Figure 7, which suggests there is a serious sampling error for the small ethnic populations.
Insofar as there is a trend it would seem that those living in Pacific Island households (i.e. one adult in the household was a Pacific Islander) experienced a falling position in the distribution in the 1980s (and on average were about 86 percent of the national average). Meanwhile the Maori trend seems to be slightly rising to 1987/8 and lower after 1988/9, although the peak in 1988/9 is extraordinarily close to the national average. The Maori mean over the period is 88 percent of the national average.
Figure 8 also shows the position of households with children. The rise in 1988/9 probably reflects the improvement in family support in that year. The average for the period for is 90 percent, consistent with the picture that there are many households with children in poverty. (Insofar as the household equivalence scales overestimate economies of scale, children will be worse off than the level reported here suggests.)
8. THE FULL INCOME HOUSEHOLD DISTRIBUTION
“Full income” is the notion economists use when they are adjusting disposable income for the services they receive from government, for the effects of prices, for other changes in the quality of life (including hours worked) and for other factors such as inter-household transfers (not discussed here). There is no detailed study in New Zealand of full income; we discuss some studies which provide some insights.
8.1 Adjusting for Government Services
Following pioneering work by Suzanne Snively (1988), the Department of Statistics New Zealand study The Fiscal Impact on Income Distribution (1990) adds to adjusted household disposable income other government spending and subtracts indirect taxation. The allocation of this government spending is problematic. (For instance, external debt servicing is allocated “equally to each household”, whereas it could be argued it should be allocated to those of the generation alive when the net debt was incurred). The data is for the three years 1981/2. 1985/6, and 1987/8, and is ranked by decile of market income. The share of each household decile of what the report calls “adjusted market income” and what is called here “nearer full income” is shown in table 9. (That the ranking is by market income means that it overestimates the share of income in the lower deciles if they were ranked on a nearer full income basis, and underestimates the share in the upper deciles.)
Table 9 suggests there was a rise in the inequality of market household income. The top three deciles had 59.1 percent of income in 1981/2 and 63.3 percent in 1987/8. Meanwhile the bottom four deciles had 10.9 percent in 1981/2 and 6.6 percent in 1987/8. The most likely cause for this shift is the factor income switch, the rise in unemployment, and the variation in negative incomes of the self employed in the bottom decile.
|HOUSEHOLD SHARES OF
MARKET INCOME AND NEARER FULL INCOME
|/||MARKET INCOMES||NEARER FULL INCOMES|
Source: Department of Statistics (1990)
Notes: “Nearer Full Income” is called “Adjusted Market Income” in the original source.
The “nearer full income” distribution shows a different pattern. This time the top three deciles had 47.9 percent of the total income in 1981/2, higher than the 46.3 percent in 1987/8, while the bottom four deciles increased their share from 22.6 percent to 25.1 percent over the same period.
It is possible to trace through the various adjustments and to identify the main influences on the transformation from a more unequal market distribution to a less unequal nearer full income distribution. This is done in Table 10, which ranks the various components of near full income, using a gini coefficient ranked on the household’s market income.
|GINI COEFFICIENTS OF COMPONENTS OF NEAR FULL INCOME1|
|CONTRIBUTING TO BECOMING MORE UNEQUAL|
|Personal Income Tax1||.472||.435|
|All Taxation and Other Receipts1||.394||.364|
|HARDLY ANY CHANGE|
|General Government Goods||.251||.251|
|CONTRIBUTING TO BECOMING LESS UNEQUAL|
|Other Government Receipts1||.250||.443|
|Social Welfare Payments2||-.370||-.433|
|Interest Payments and Other Spending||.222||.202|
|All Government Payments||.024||.007|
|ADJUSTED MARKET INCOME||.263||.235|
Source:Department of Statistics (1990), calculated from Tables 33 and 35.
Notes: 1. The gini coefficients are calculated on households ranked by market income.
2 Because these a deducted from market income, a fall in the gini coefficient increases inequality, and vice versa.
3 The negative gini coefficient indicates relatively more spending in the bottom deciles.
The basic picture is that the distribution of government revenue (mainly taxation) became more unequal, because of a reduction in the progressivity of personal income tax and indirect tax. Meanwhile government payments became less unequal, most evidently because social welfare spending became more concentrated on households with low market incomes (but also from spending on health and interest payments and other spending).
It might seem that the revenue effect is greater than the spending effect. But gini coefficients do not allow for relative changes in the size of each component. For instance the total impact of taxation is not just a matter of its progressivity, but also of magnitude. (Consider a tax system which is totally progressive in that it is only levied on the richest person in the country, but that it is levied at a total rate of $1. It would barely change the progressivity of the after tax distribution.) The rise in the average level of taxation offset the fall in the progressivity of taxation, while social security expenditure in particular was rising. Thus despite market income becoming more unequal, the overall effect was that nearer full income on this measure became less unequal.
The analysis so far has assumed that there has been no change in price relativities which affect the distribution of income. But relative prices do change. Usually it is assumed that while the changes affect individuals, they do not affect different parts of the distribution or social groups markedly differently. There is not a great deal of evidence on the correctness of this assumption. Jackson (1978) found little difference in the price indexes for different household groups. Scott et al (1985) observed that the switch from sales tax to GST would be inimical to the interests of those on lower incomes (only partly offset by the income taxation reform). Perhaps the one major difference is likely to occur because of different housing situations, an hypothesis supported by Statistics New Zealand recently published consumers price index for National Superannuitants, which showed lower increases in a period of rising interest rates, because of the retired’s lower outlay on mortgage debt servicing.
More recently Chatterjee and Ray (1993) constructed “true costs of living indices” for various years between 1983/4 and 1991/2. Their indices rose more for those in the lower quintile than in the upper quintiles, and more for couples without children than for couples with one child -the only household groups examined. The observed differences were less than 10 percent of the total price increase, but were based on indices which were disaggregated to only four commodity groups. Nevertheless there is a plausible case that the changes in relative prices were disadvantageous to the poor, but we do not know of the magnitude.
8.3 Quality of Service
In 1993 Insight Research New Zealand Ltd, asked respondents to their regular survey “[l]ooking back over the last 2 or 3 years do you think the quality of service you usually receive when you purchased goods and services has improved a lot, a little, stayed about the same, got worse or got a lot worse?”
To report the results in a simple way we look only at the difference in percentage between those who thought there was an improvement and those who thought there was a worsening. While the survey examined 33 social categorizations, we focus on the response by “Main Breadwinners’ Income”.
The first conclusion, satisfying for those who believe in the efficacy of the market, is that a net balance of 23 percent thought there had been an improvement in quality of service over the period, with 40 percent thinking there had ben an improvement and 17 percent a deterioration. However the responses differed between income groups as reported in Table 11. The poorer the “main breadwinner”, the less impressed they were by the quality change.
|VIEWS OF QUALITY OF SERVICES BY MAIN INCOME OF HOUSEHOLD
Net Percentage of Respondent
|Main Bread Winner Income||Has Service Improved or Worsened?||Is Service “Excellent” or “Only Fair” or “Poor”?|
Source: Insight Research New Zealand Ltd, Supplementary Tables, August 1993, by permission.
Notes: Nets are calculated as percentage of total less “unsure”.
A similar pattern applied in responses to the question “[d]o you think the quality of service you get from the following is usually excellent, good, only fair, or poor?”, for four services: airlines, banks, lawyers, taxis. Here we net out the “excellent” from the “only fair” and “poor” responses (excluding those who said they were unsure). The nets for all respondents were +10 percent for airlines, -11 percent for banks, -35 percent for lawyers, and -35 percent for taxis. Table 11 shows that in the case of airlines, and to a lesser extent banks, the disenchantment is concentrated in the lower income groups, whereas for the other two services it is more across the board.
One would not want to make too much of this one-off question, but it does suggest that while market liberalization may have improved overall quality (Bollard and Easton 1985), there may be groups who are worse off. Market liberalization may redistribute quality of service, perhaps against the poor.
8.4 Hours Worked
Full income recognizes that income differences may reflect differences of hours worked, and adjusts income for that. This has never been done in New Zealand although, for instance, hours worked data is collected in the population census.
8.5 Assessing Full Income
This section has illustrated that personal and household distributions are not enough by themselves to assess distributional effects. The indications are that “adjusted household income” – what we defined as “near full income”, has experienced decreasing inequality under the reforms, at least up to 1987/88. This appears primarily due to the less progressive tax system being off set by higher average tax levels and by better targeting of government transfers and spending. However this conclusion is moderated to some extent by the evidence that the poor suffered more in price terms, quality of service, and unemployment.
This conclusion of adjusted household income becoming less unequal up to 1987/8, does not apply after that date. But we shall have to use different data sets to establish that.
9. THE 1990 AND 1991 WELFARE REFORMS
In addition to the 1988 income tax cuts, the most important redistributive package of the reforms was that of the 1990 Economic and Social Initiative (Bolger et al, 1990) and the closely related 1991 Financial Statement (Richardson 1991), described as the “redesign of the welfare state”. As well as “more market” reorganizations of state involvement in accident compensation, education, health care and housing, they involved a major reduction in most social security benefit levels and entitlements, plus introduced – or increased – user charges, while the Employments Contract Act (1991) was also seen as an integral part of the package.
The nominal reason for the measures were the actual and projected budget deficits, which the official statement exaggerated to justify the harshness of the cuts. The cuts were on the poor. In addition the Prime Minister promised to reduced state assistance to the rich, although this was not pursued with much diligence thereafter (with the exception of tertiary education fees):
“… in moving to reduce the fiscal deficit, we have rejected the simple option of increasing taxes. However, top income earners are on a low rate compared with most overseas countries. That being so, we will be looking to this group to pay for more of the social services they currently receive free or with heavy subsidy from the state.” (1990:10-1)
There was perhaps an unarticulated argument which arose from the a belief that the unemployment benefit level was discouraging active job search. Perhaps too it was thought the benefit was propping up the lowest wages, which were discouraging job creation by firms. Undoubtedly the government saw its benefit cuts and Employment Contracts Act as a part of the same package. Unfortunately there is not a lot of official documentation as to any underlying economic principles, yet it would be surprising if some advisers did not have some such economic account underlying their thoughts.
Whatever the intention, the sickness benefit cuts were deep (Figure 5), and the unemployment benefit cuts even deeper. Up to March 1991, both benefits were close to the Royal Commission’s BDL. After, they were 7 and 18 percent lower (Table 7). In addition the stand down period for the unemployment benefit was increased to six months, and other benefit eligibility rules tightened.
9.1 The Intended Fiscal Impact of the 1990 Package
|THE FISCAL IMPACT OF THE 1990 PACKAGE|
|Market Income Quintile||Market
|Spending Power||Effects of Cuts|
|Before Package||After Package||Absolute||Percent|
|$ p.w.||$ p.w.||$ p.w||$ p.w.||%|
Source: Easton (1991)
Notes: Spending Power is market income after adjustment for direct tax and benefit income, and changes in user charges.
While there is not the ongoing data series to evaluate the cuts, we can use an ad hoc procedure to update them. It involves the assumption that the change to market incomes and other government policy impacts did not affect the underlying distribution between 1987/8 and 1991/2 – a conservative assumption given the evidence of the chapter this far.
Given these assumptions we can update the 1987/8 “Government Income and Outlay by Market Decile” table of the Fiscal Impact on the Income Distribution report (1990:table 33), to 1991/2, using actual events and Treasury forecasts (which may differ from outturns).
Since we also know the individual components of the table (such as spending on the unemployment benefit by decile), the individual items can be adjusted according to the Treasury estimate of the savings. Thus the impact on actual household spending power can be calculated. The result is shown in Table 12.
The top quintile suffered little, not surprisingly since the only significant reductions were the loss of family benefit at $6 p.w. per child, and a slightly higher charge for some medical treatment. (Tertiary student fee increases come later.) On the other hand those in the lowest quintile, who are very dependent upon social security, suffered heavily from the benefit reductions of level and eligibility.
9.2 Changes in Poverty Numbers
Just as we use a mean or coefficient of variation to characterize some feature of an income distribution, we can also use a poverty line. It is not appropriate to review here the poverty line debate (see Easton 1995b). For our purposes a poverty level provides a useful insight into the overall impact of the 1990/1991 packages on those with low incomes. The poverty line used here is that set by the 1972 Royal Commission on Social Security, an amount it judged as sufficient for participating in and belonging to a community (1972). Known as the BDL (Benefit Datum Level), it is the rate set as suitable for a couple on the benefit. The Royal Commission recommended a married couple benefit rate of $33 a week in September 1971, or $270 a week in today’s prices. (See Table 7.) If it had been increased in line with long term real income growth, it would have been 12 percent higher. (Easton 1995b)
As a result of Mowbray’s work, It is no longer necessary to use a single poverty level, nor provide poverty estimates in a particular year. Figure 9 provides estimates of the proportions of people (not households) below seven different poverty lines (the middle one being the Royal Commission BDL) for each of the available years between 1981/2 and 1992/3.
All the poverty lines show a show a major increase in poverty in the early 1980s, with some deterioration after 1988. In proportional terms the Royal Commission BDL records one of the lowest increases in poverty in the range. The numbers rose from about 430,000 in 1989/90 to 593,000 in 1991/2, an increase of just over 35 percent. (Easton 1995b)
This is a very big increase, although one supported by anecdote and surveys of increasing hardship. It probably cannot all be attributed just to the benefit cuts. Real per capita GDP fell about 4.0 percent over the two years, while unemployment rose from an average rate of 7.1 percent in 1989/90 to 10.6 percent in 1991/2. At the very least, one could say that the poor were not protected from the economic deterioration, but probably it would be fairer to say the cuts worsened their circumstances when the economy was deteriorating.
It should be noted, however, that on the basis of spending patterns on health and education that there is no evidence that the poor suffered more than the rest of the community from the user charges and other measures, perhaps not so surprising because the user charges tended to be income related. (Easton 1993)
9.3 The Impact of the 1990 and 1991 Welfare Reforms
On the systematic evidence available, supported by anecdote, there can be no doubt that the welfare reforms of 1990 and 1991 increased economic inequality and generated hardship among the poorest in the community. Perhaps it should be added that the indications are that there will be little relief for the poor over the rest of the decade if the current policies and economic outcomes are continued. According to the Treasury Pre-Election Briefing (1993), the expectation is that benefit levels will not be increased in real terms, unemployment levels will stay above their 1989/90 rates, there will be more – usually minor – cuts to welfare support, further cuts in government spending which are likely to require private outlays, and real wages for the low paid are not expected to rise – and may fall – because of the unemployment overhang. Easton (1993) Since then the prognosis has been a little more optimistic, insofar as projections of unemployment are expected to remain high, but lower than the levels forecast in 1993. However there appears to be no intention to increase benefit levels, and thus far little indication of a significant increase in family support, which is likely to be the main means of moderating child poverty. (There has also been some cuts in benefit entitlements not presaged in the 1993 forecast.) The expectations of the poorest in New Zealand remain gloomy, other than if they obtain work.
9.4 THE OECD DISTRIBUTION OF HOUSEHOLD DISPOSABLE INCOME
In recent years the Luxembourg Income Study (LIS) has assessed changes in household income in different countries on a common basis. New Zealand is not a member of the study, but the LIS researchers have used available New Zealand data, to locate New Zealand as best as possible. Fortunately a New Zealand-Australian comparison exists, whereby we can cautiously locate New Zealand in a wider picture. The income unit used has market income supplemented by social security entitlements, with taxation deducted to give equivalent disposable income (section 8).
Using the LIS data base, Atkinson, et al (1993) examined trends in income inequality in 13 OECD countries and concluded “for the nations we can study over the [1980s], inequality rose in a majority of nations studied and particularly in the United States, the United Kingdom, and Australia” (1993:20). Thus there was a general tendency for disposable household income inequality to rise in the 1980s, but there were considerable differences between countries. Given our earlier identification of downward pressures on real wages and upward shifts in interest rates we should not be surprised at the conclusion, but reductions in tax progressivity also played a part. No country can completely isolate its tax system and levels from international trends. One of the pressures on New Zealand was the international lowering of top tax rates, although this does not explain why New Zealand lowered its top rate so far.
RANKINGS OF HOUSEHOLD ADJUSTED DISPOSABLE INCOME
Finland, Sweden, Norway, Belgium,Luxembourg, Germany, Netherlands,
Source: Atkinson et al (1993)
Using gini coefficients, Atkinson, et al (1993) grouped countries by inequality of household incomes in the 1980s (Table 13). It was not possible to include New Zealand fully. However Saunders (1994) compared New Zealand and Australia by adjusting the latter’s data parallel to the published New Zealand data. He found that the equivalent disposable distribution in Australia and New Zealand were both becoming less equal in the 1980s, but that the New Zealand distribution was less unequal than the Australian one. On the basis of the estimated gini coefficients, New Zealand is in an intermediate position between the “Northern Europeans” and the “Southern Europeans plus Commonwealth”, as Atkinson, et al (1993) had also judged.
If it is difficult to place New Zealand in an international hierarchy, it is even more hazardous to assess the extent it has changed its placing in the hierarchy. One attempt so was by the Joseph Rountree Foundation Inquiry into Income and Wealth (1995:65-6, based mainly on Atkinson 1994). The New Zealand data only covers the 1980s and shows increasing inequality in the latter part of that period (consistent with the above findings). The study finds that the United Kingdom distribution was less unequal than New Zealand in the early 1980s, but by the mid 1980s it had become more unequal (as is Table 13). During the late 1980s New Zealand inequality is growing faster, and the table concludes “income inequality has been growing more rapidly in the UK than any other country [of a total of 20] except New Zealand)”. It seems likely this conclusion would also apply to the early 1990s.
In summary the rich world generally, but not uniformly, experienced increasing household disposable income inequality during the 1980s. New Zealand appears to be a middle ranking country in terms of rankings of inequality, but from the mid 1980s it appears to have suffered the greatest increase in inequality than any other OECD country.
The economic reforms where among a number of things which caused a dramatic change in the distribution of wealth, income, and spending power in the 1980s and 1990s. While individuals and groups were affected by the change, which can be traced at the level of anecdote and case study (e.g. Duncan et al 1994), these microeconomic changes need no accumulate to a macroeconomic change of the aggregate distributions. However there was such aggregate change, most evident in some of the available measures of the household disposable income distribution.
Our task has been not only to describe these changes but to try to identify the causal processes which generated them. In the introduction we identified six exogenous groups of influences. We can now assess each’s importance, in terms of the evidence available. The order of presentation is from least important to most important. Some processes not mentioned in the main text because there was no useful evidence are mentioned here as hypotheses.
There is no evidence of overall change in the factor endowment over the period. It does not seem necessary to use it to explain the changes in the economic distributions. One possible process, not explored here, is the possibility that exogenous technical change affected the value of types of human capital. In particular, an increasing demand for skills was not matched by an increasing supply, which generated unemployment among the unskilled. The data is not available to test this hypothesis.
The role of social factors such as women’s work preferences, household composition, and demographic change remain shadowy. Undoubtedly the former affected the gender distribution, and probably reduced aggregate inequality – although perhaps not by much in the 1980s. There is no published work yet on the impact of changing demography on the economic distribution, although Easton (1995a) notes that smaller households means that the average real incomes on a household equivalence basis are rising more slowly than they do on a personal basis, reflecting the reducing household size and the resulting loss of economies of scale.
There is a popular claim that the rise in solo parent families (or domestic purposes beneficiaries) has contributed to rising inequality, but there is no systematic evidence to support what at the moment amounts to a popular prejudice or, at best, an untested hypothesis. It does seem likely that the changing age distribution – at the moment towards the elderly and young people, may also affect the distribution. but the change is slow, and the magnitudes may not be large enough to generate the spectacular changes we saw in the late 1980s.
With a few, probably minor, exceptions it has not been possible to demonstrate that the market liberalization affected the aggregate distributions. While undoubtedly it affected the experiences of individuals, it appears that it impacted on all income strata roughly equally. This perhaps was a consequence of the effects of the old regulatory regime of detailed market intervention being so widespread that almost all social classes were beneficiaries from, and contributors to, the cross-subsidization.
The exceptions were that it seems possible that the change in relative prices tended to favour the rich, who report benefitting more from the improved quality and choice that liberalization generated. It is also possible that some sectors benefitted more than others. Probably part of the spectacular growth of the finance sector in a time of economic stagnation, was due to the liberalization of monetary markets.
The one liberalization change which we have not been able to trace, because it is too recent and the data is not yet available is the impact of the 1991 Employment Contracts Act. It is possible that the new industrial relations regime contributed to a widening of dispersion in labour earnings, although it could be argued the enactment facilitated a change which was already underway from other influences. We need longer data runs, and the record of at least one entire business cycle to assess this.
Undoubtedly changes in the world economy affected domestic factor prices, which would have increased to increasing inequality, as occurred elsewhere. However the external relevant changes occurred in the late 1970s and early 1980s, but may not have impacted markedly until the late 1980s when other changes were much more important.
The effects of the four groups of exogenous influences thus far identified have all been negligible, small, or slow. The remaining two influences were far more significant.
Insofar as the macroeconomic policies of the reform contributed to a rise in unemployment and thus reduced utilization of labour, we would expect this to impact on the income distribution. However the study observed that there was a sense in which unemployment became more dispersed through the income distribution. Nevertheless there is clear evidence of a weakening of incomes of those just above the social security benefit levels, in the period after 1988. Typically these are households dependent upon wages, in the most marginal parts of the labour market. More vulnerable to unemployment and to relative wage reductions, the evidence is that they suffered relative to other groups in the community. It is especially significant that the changes occurred before the 1991 reforms.
Nevertheless the largest impact was from the change in tax and benefit policies. The 1988 income tax changes, which cut top rates, without comparable changes in bottom rates, but with the elimination of a range of tax concessions, gave a substantial boost to the incomes of the highest 10 or 15 percent of households to the detriment of the rest. Unlike the 1983 and 1986 cuts however, fiscal creep did not pull those benefits back. In any case the income tax system at the top end is getting so flat that any fiscal creep would have been small even had the inflation rate been higher.
A second change, which reduced inequality albeit in a small way, was the family support package of 1989. However its real value depreciated with inflation, and so the boost to families becomes less noticeable a few years later.
The third change, of a magnitude and permanency (thus far) comparable to the 1988 income tax reform, was the 1991 benefit cuts, although we observe some weakening of real benefit levels from 1989, presumably a fiscal consequence of the funding of the substantial income taxes cuts.Without question the benefit cuts reduced the incomes of the poorest, increased household income inequality, and added to the social hardship.
It may be that the 1991 benefit cuts should be seen as a consequence of relieving the fiscal stress generated by the 1988 income tax cuts (which had been temporarily covered by assets sales). However the political explanation was a “redesign of the welfare state”, although it is still difficult to see past the rhetoric to a coherent social vision, other than a notion of a higher degree of income inequality than in the past. Perhaps an account could be constructed based on the widening of the earnings dispersion from the higher levels of unemployment, the changing world factor price relatives, and perhaps the changing domestic factor endowment. It has yet to be done, and in any case it may find difficulty explaining the high marginal tax rates that were left on beneficiaries and others on low incomes.
What might an outsider contemplating a New Zealand type economic reform make of the experience? In part it depends upon what constitutes the reform. If it is only market liberalization, there is little evidence it impacted substantially on the aggregate economic distributions, although we noted some minor changes. Moreover the evidence is at this stage agnostic as to what extent liberalization in the labour market has distributional effects. Other influences such as the world economy and the factor endowment may be more important.
If the reforms require the market liberalization to be linked with a set of associated macroeconomic policies which generate economic stagnation and rising unemployment, then the total package is likely to lead to some rise in inequality. However the observable increase in inequality is not as great as this writer, for one, might have predicted if asked in the early 1984. This is because the unemployment appears to have been through more of the income distribution than one might have thought then. The real cost of the macroeconomic stagnation, and the consequent unemployment, was poor economic growth and diminished relative welfare, which appears to have been relatively equally shared through the factor markets and the personal income distribution.
If however, the tax and benefit changes were an integral part of the reforms, then without question the reforms led to substantially greater economic inequality. Tax rates were cut on those on highest incomes, while they were raised on those at the bottom; after-tax incomes were increased for the rich paid for by reducing the after-tax and benefit incomes of the poor. That is what one might have predicted in the early 1980s before the reforms were commenced. The prediction is clearly confirmed in the data in the 1990s after the policies were implemented.
I am grateful to comments and assistance from Srikanta Chatterjee, David Mayes, Mary Mowbray, Suzanne Snively, Susan St John, and the three editors.
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Return to Income Distribution: Part I