Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: Tackling the wage gap a tricky exercise

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Photo / Brett Phibbs
Photo / Brett Phibbs

Increased income inequality has been a pretty universal trend among developed countries over the past 25 years.

That does not mean there are not instructive differences between them or that we should be complacent about the fact that by several measures income inequality has risen more steeply in New Zealand than elsewhere.

But it does suggest there are big historical and global forces at work here, not just failures of domestic policy or more fundamentally of human sympathy. More to it, in short, than an institutionalised "I'm all right Jack" outlook.

Policymakers have, after all, made efforts to mitigate the effects of rising inequality.

Again, that is not to dispute that more could or must be done. But it is important to recognise the limits they face.

First, let's put some numbers to the problem.

Between the mid-1980s and the onset of the global financial crisis in 2008 the average annual rise in real disposable household incomes across 29 OECD countries was 1.7 per cent.

For the lowest-income decile or 10th of households income growth averaged 1.4 per cent a year, compared with 2 per cent for the top decile.

New Zealand underperformed in terms of household income growth, managing only 1.4 per cent per annum overall, and a higher share was captured by those at the top.

Real incomes for the lowest decile of households in New Zealand grew an average of just 1.1 per cent a year, while the top decile enjoyed growth of 2.5 per cent.

If you rank households by their disposable income, the income of one 10 per cent up from the bottom of the distribution was 13 per cent higher in 2010 than in 1988 (up $1900 in 2010 dollars), while one 10 per cent down from the top had risen 39 per cent ($17,200) over the same period, according to the Ministry of Social Development's 2011 report on household incomes.

The gap between them widened from a multiple of just over three times to nearly four, and even more if housing costs are taken into account.

Another gauge of inequality is the Gini co-efficient. It is calibrated to run from zero, if everyone had the same income, to one, if all the income went to only one person.

By that measure inequality in household disposable incomes in New Zealand is a bit above the average for OECD countries of 0.31, but notably lower than (that is, on the more egalitarian side of) the United States or Britain.

It has increased over time.

New Zealand has recorded one of the largest increases in the OECD in its Gini co-efficient since the mid-1980s, though from a relatively low base.

The steepest rise occurred during the period of radical economic reform from the mid-1980s to the early 1990s. It continued to rise, more slowly, through the rest of the 1990s but was flat through most of the past decade.

An OECD report last month charted the top 1 per cent of earners' share of total taxable income and how that had changed since 1980.

New Zealand has gone from the seventh lowest of the 19 countries in the sample in 1980 to the ninth lowest by 2008.

Data like this can be spun either way to suit people's rhetorical agenda.

The glass-half-empty view would be that inequality by this measure has increased by more than in most comparable countries.

The glass-half-full view would be that it has only increased to a level that still has us on the more-equal side of the OECD median and much less than in the US and Britain which are home to global financial centres.

So what are the drivers of income inequality and what can be done about them?

Unfortunately two of the major drivers, technological change and globalisation, are not things that can be reversed or even resisted for very long.

The same advances, in information and communications technology especially, which amplify the productivity of people at the higher end of the continuum of skill levels, tend to have hollowed out the middle.

How many clerical jobs, for example, have been computerised out of existence? When did we last see a job ad for a copy typist or key punch operator?

Something similar may be under way in bricks-and-mortar retailing.

By contrast the highly skilled and the relatively low-skilled performing manual but non-routine tasks, the professor of ophthalmic surgery or the window-cleaner if you will, are less at risk from the digital revolution.

Globalisation, meanwhile, has a hollowing-out effect as well.

In an era of multinational supply chains, the labour-intensive parts of the value chain are migrating to countries where labour costs are low, and not just in manufacturing but in some service sectors - call centres being an obvious example - as well.

The OECD says a link between globalisation and inequality is supported by a growing body of studies of individual firms, but it is more difficult to establish a robust link at the country level. "New empirical evidence suggests trade raises the dispersion of income among full-time workers only when unions have little clout or when employment protection is lax."

But it adds that in the presence of strong unions trade seems to have a more negative effect on employment.

But before we get too fatalistic there clearly are other influences on inequality that are within the reach of New Zealand policymakers.

Measures of inequality are significantly greater if you look at pre-tax rather than after-tax incomes, and if you take individuals rather than households as the relevant unit.

Comparing tax regimes between countries, and even over time, is fraught with complexities. All sorts of differences make a difference.

It is no good just comparing the top marginal rates for personal income tax for example, unless you look at the thresholds at which they kick in and how may holes there are in the tax base.

The fact that neither mortgage payments nor retirement savings are deductible, as they are in some other jurisdictions, makes the income tax more progressive than it might appear at first glance.

On the other hand the fact that imputed rentals (the benefit homeowners derive from not having to pay rent out of their disposable income) are not taxed, while home ownership rates are falling, suggest it is becoming more regressive.

The temptation to tax those on higher incomes more runs up against another globalisation effect, the mobility of labour.

People who are, or more to the point can realistically aspire to be, in the top income bracket are free to leave the country and put their largely taxpayer-funded educations to work somewhere else. That is not to say that the diaspora consists entirely of tax exiles, only that given the income gap between New Zealand and most other developed countries we need to be wary of a tax system that makes that problem worse.

The tax system cannot be separated from the various forms of income support ranging from Working for Families tax credits through to New Zealand Superannuation to welfare benefits.

The Tax Working Group in 2009 found that "net" taxes - income tax paid less WfF tax credits, NZ Super and benefits - were negligible or negative for about half of all households.

- NZ Herald

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