Extracted from the full report published in The New Zealand Journal of Sociology, Vol 28, Issue 3, 2013, pages 9-66. (http://www.eastonbh.ac.nz/2013/12/economic-inequality-in-new-zealand-a-users-guide-summary/)
Keywords: Distributional Economics; Statistics;
Key Messages
Section 1: Why is Economic Inequality Important?
1. The section identifies four main issues as to why inequality may be important
– equity
– plutocracy
– efficiency
– inequality may contribute to economic instability
Section 2: Measuring Inequality
2. There is no single perfect measure of inequality. There are numerous imperfect measures which may be used for different purposes. Sometimes they contradict one another.
3. The exact variable which is being measured matters. Among the options for measuring income (or wealth) are that of persons (adults with or without children) or of households and, in the case of income, before or after tax and transfers. Always check definitions (and dont trust that inexpert writers have). Be aware that the measures may not be comprehensive.
Section 3: The Census Income Distribution (Table 1)
4. Total personal income of adults as measured by the census (which is – before tax – market income only to 1981 and includes social security from 1981) shows relatively stable inequality from 1926 to the 1950s and then falling to 1986, followed by rises.
Section 4: Household Income Inequality (Table 2,3)
5. There is an unequal distribution of (equivalised) household income distribution. In 2012 about two-thirds of New Zealanders were in households with an annual household income of between $29,000 and $48,400 per (equivalised) person. A sixth were in higher income households; a sixth were in poorer households.
6. Today New Zealand is a more unequal society than it was three decades ago. However most of the increase in inequality occurred in the period between the mid-1980s and the mid-1990s. The width of the distribution (as measured by the Coefficient of Variation) increased by over a half. The trend after the mid-1990s is more ambiguous. The best interpretation is that the income distribution has remained at roughly the same level of inequality over the last two decades.
Section 5: Household Market Incomes (Table 4)
7. It is difficult to interpret changes in the household market income distribution. It probably follows much the same pattern as household disposable income. It may not be a particularly relevant indicator.
Section 6: Explaining Changes in the Level of Inequality: Market Influences
8. The rise in structural unemployment seems to have increased income inequality. Cyclical unemployment is important.
9. A major influence was a rise in the income share of the top 1 percent of adults. Their share rose from about 6 percent in the early 1980s (that is 6 times the adult average) to 10 percent today (10 times the adult average). Most of the shift occurred in the period between 1998 and 2003. The two major influences seem to have been a change in the tax treatment of dividends and an increase in margins for management and professionals over average workers.
10. There is not much evidence on the impact of prices and wage relativities (other than the margins mentioned in paragraph 9).
Section 7: Explaining Changes in the Level of Inequality: Social Influences
11. Changes in the family and household structure and in the socio-demographic attributes of households had some impact – raising the level of inequality.
Section 8: Explaining Changes in the Level of Inequality: Redistribution
12. A major reason for the rise in equivalised household disposable income inequality between 1985 and 1993 is partly explained by the dramatic changes in redistribution between income levels that New Zealand experienced. The income tax scale was flattened and the introduction of GST imposed more heavily upon those on lower incomes. There were savage cuts to benefit levels in 1991 and more user pays for health and education so that more costs were pushed onto households, which the poorer ones found harder to bear.
13. While there was relative stability in the household income distribution after 1993, the relative share of the bottom quintile fell from the late 1990s. The group’s real incomes rose but less than average, probably because benefits were increased in line with prices rather than wages, so beneficiaries did not share in the rising real wages, beneficiaries were not entitled to the child tax credit, which was later expanded and called the ‘in work tax credit’ under working-for-families, and because many beneficiaries were unable to take advantage of the booming labour market.
Sections 9, 10.11: International Comparisons (Tables 5, 6)
14. New Zealand was 9th out of 34 in the OECD ranking of inequality in about 2009, after adjustment for population and per capita GDP. It was about 20th in 1985, so it moved from being in the bottom half of the OECD to the top half. (The measure used here is internationally comparable Gini coefficients.)
15. Over the whole three decades between 1982 and 2012 the increase in New Zealand income inequality was not the greatest.(The Swedish change seems to have been much higher.) But it had the greatest increase in income inequality in the decade to 1995.
Section 12: What Happened Before 1985?
17. We do not know what happened to household incomes before the 1980s because there are no data.
18. However personal market income seems to have been stable in the interwar period and declined in the early post-war period to 1981.
Section 13:. What Happened After the Global Financial Crisis?
19. The preliminary indication is that the Global Financial Crisis impacted more on top disposable incomes than bottom ones, so that there was some reduction in income inequality. This was despite the post-GFC income tax changes being biased towards the rich and despite some tightening of benefit entitlements. The probable explanation is that returns on investment fell while unemployment in New Zealand has not been too heavily affected by the downturn. (The Canterbury Earthquakes adds to the difficulties of interpreting the short data series.)
20. While the 1972 Royal Commission on Social Security pointed towards a notion of relative poverty, official policy since 1991 seems to be concerned with absolute poverty only.
Section 14: Poverty Measurement
21. Poverty lines based on median incomes are flawed, because poverty can be reduced by transferring income from the middle to the top.
22. A higher proportion of the population experienced relative poverty after 2000 than in the 1980s. – perhaps 2 to 4 percentage points.
23. The majority of the poor are parents with jobs and their children (although they may have had only one or two), living in their own home albeit usually with a mortgage. The proportion in poverty is higher among solo parents, those without jobs, living in rental accommodation and with a brown ethnicity (but there are fewer of each category). More women than men are poor. While the incidence of poverty is higher among Maori and Pasifika, there are more poor who are not of their ethnicity.
24. The salient conclusion from the research is that over 80 percent of the poor are children and their parents (and others in their households) and that proportionally more children are in poverty than adults (especially those adults who are not parents).
Section 15: Distribution by Social Groups (Table 7)
25. Mean Maori equivalised household incomes were 90 percent of average in 2012 and Pasifika ones were 89 percent. European/Pakeha ones were 107.5 percent.
Section 16: The Dynamics of Inequality
26. Although there is considerable dynamism in the income distribution as some people and households shift their relative locations over time, there is also considerable inertia.
27. One study found about half of those below the study’s poverty threshold at a point in time were in chronic (‘permanent’) poverty – the figure for children was 60 percent. The proportions will be higher if a higher poverty threshold is used.
Section 17: Income and Health (Table 8)
28. In any given age group, those in the lower income quintiles are in poorer health than those in the higher income quintiles. Some infectious diseases seem to be associated with poverty.
Section 18: Wealth
29. Physical and financial wealth is much more concentrated than personal income. While there is a life cycle to wealth holdings (peaking at about the age of 60), within each age cohort, wealth is also very unequally distributed. The main form of this wealth holding is housing.
30. The vast majority of the adult population had little physical and financial wealth. In 2003/4 6.5 percent had negative net worth, although this may be dominated by those with student debt. Conversely 1 percent of adults had 16.4 percent of total wealth, about the same share as the bottom 70 percent of the population. There is not a lot of gender inequality, but each European/Pakeha owns about 2.6 times that of the other ethnic groups. Larger families (with more than two children) have less wealth.
Section 19: Housing
31. Very little is known systematically about the impact of housing on inequality but from what is known differences in housing outgoings tend to increase effective income inequality.
Section 20: Inequality and Growth
32. While per capita National Income in constant expenditure prices rose at a trend rate of 1.7 percent p.a. between 1982 and 2012, Sen’s real national income – which is more sensitive to distributional change – rose only 1.3 percent p.a. because of the rise in income inequality. In effect on Sen’s measure the additional inequality cost New Zealand economic growth almost a fifth.
Section 21: Epilogue: Towards Policy Responses
33. While the focus of the survey is on the facts and related analytics rather than policy – on getting things right – there is a preliminary discussion of predistribution and redistribution policies.
34. This survey of economic inequality concludes
… those who command policy – whether effectively or ineffectively – have to decide to what extent reducing (or increasing) economic inequality is a policy objective. Is New Zealand satisfied with shifting from a low inequality to a high inequality society? What would its founding nineteenth century migrants have thought about the fact that, after allowing for each country’s size and affluence, New Zealand is now more unequal than the countries they left? And what would those who invited them here have thought had they known their descendants would be firmly in the bottom end of the unequal distributions?