Brian Fallow 's Opinion

The Economics Editor of the NZ Herald

Brian Fallow: Report reveals picture of rising inequality

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The income gap between the rich and the poor has been widening. Photo / Thinkstock
The income gap between the rich and the poor has been widening. Photo / Thinkstock

That the recession saw incomes fall and inequality widen comes as no surprise.

Even so, the latest incomes report from the Ministry of Social Development, which carefully quantifies those effects, makes sobering reading.

It records a drop in real household incomes of 2.7 per cent between 2010 and 2011. That is at the median, or midpoint of the distribution when incomes are ranked by size.

For the top 30 per cent real incomes rose.

But for most households they fell, by as much as 5.5 per cent at the 30th per centile, that is, three-tenths of the way up from the bottom.

The ministry's latest report is the first to fully capture the effects of the recession. That is because there are lags between a drop in economic activity and its effects on the labour market and other sources of income.

Further lags arise from the statistical surveys the report draws on and the time it takes to then crunch the numbers.

What may come as a surprise is that the latest dip in real incomes follows 15 years in which real household income rose by around 3 per cent a year and the growth was pretty evenly spread.

But only 40 per cent of that increase can be explained by increases in average gross wages.

Tax changes helped but even so average after-tax wages only grew 24 per cent in real terms over that decade and a half.

Much of the other half of the household income growth is down to more women joining the labour force, especially in two-parent families with dependent children.

By 2004 nearly three in every four two-parent families had both parents working, up from one in two in the early 1990s. Since then the proportion has fallen, to just over two in every three.

Clearly, increasing household incomes by increasing female participation in the labour force is not a trend that can continue indefinitely.

Those 15 years of rising household incomes followed a period, 1988 to 2004, the years of root-and-branch economic reform, in which household incomes fell, for all but the top 10 per cent.

The fall was steep: a double-digit percentage decline for 70 per cent of households and 20 per cent at the low end of the distribution.

It took 20 years for real household incomes at the median to return to where they were in the early 1980s, and 25 years at the low end.

Over the past 30 years real incomes have grown four times faster at the high end than at the low end of the distribution.

One standard measure of income inequality, the Gini coefficient, rose sharply in the latest annual report, to its highest level in 30 years.

That measure can sawtooth around from year to year, however.

The trend, which smooths out that volatility, shows a sharp rise during the Rogernomics period followed by a flattening out at levels similar to Australia, Canada and the UK.

Another measure of inequality, which looks at the ratio of the income of a household 20 per cent from the top of the distribution to one 20 per cent from the bottom, also deteriorated markedly between 2010 and 2011.

The ministry cautions, however, that "it will take another survey or two to be able to see where the inequality trend will settle after the shocks of the global financial crisis, the Christchurch earthquakes and the economic downturn and recovery."

The impact of the economic downturn on incomes after housing costs is even more stark.

After housing costs, real household disposable incomes fell across the board between 2010 and 2011. At the median the drop was 4 per cent and for three of the lowest four deciles the fall was more than 7 per cent.

By this measure, "from a longer-term perspective, in 2010 the incomes of the bottom 30 per cent of the population were on average only a little better in real terms than their counterparts almost 30 years ago in 1982".

By contrast a household 10 per cent down from the top is 40 per cent better off in terms of real disposable income after housing costs than its counterpart 30 years ago.

A report by Salvation Army analyst Alan Johnson on the political economy of Auckland's housing argues that all this is a result of fundamental and systemic institutional failures, which "have allowed some Aucklanders to occupy larger and larger houses while other Aucklanders live in more crowded houses and in sheds, garages and caravans".

One of those failures is a tax system biased in favour of housing and especially owner-occupied housing.

Another, Johnson contends, is a monetary policy framework which targets consumer price inflation and is only concerned about asset bubbles to the extent that the associated wealth effect revs up debt-fuelled consumption.

Governor Alan Bollard acknowledged, in a speech in early 2010, that while monetary policy had done well on the price stability front (its statutory objective) it had not been sufficient to deliver a stable and balanced economy.

Johnson would go a lot further: "No one responsible for clinging to this orthodoxy over the past 20 years has thought to answer for the considerable damage that this unchecked housing bubble has wreaked on the New Zealand economy over this period."

The historically low interest rates prevailing in the wake of the global financial crisis have begun to warm up property markets, especially in Auckland.

But Johnson says that "beneath this veneer of improved affordability lies an abyss of household debt, most of which has been borrowed from foreign sources".

The share of household income likely to have been spent on debt servicing rose from less than 9 per cent 10 years ago to over 14 per cent in late 2008, before falling back to just over 9 per cent as mortgage rates have fallen.

But it would be dangerous to assume mortgage rates will remain this low indefinitely.

The Ministry of Social Development's incomes report says that in 2011 a quarter of the population lived in households in which housing costs swallow up a high proportion, defined as more than 30 per cent, of income. That is up from one in five in the mid-1990s and only one in 10 in the late 1980s.

And the age of the population with high housing costs has been rising relentlessly, to the point that more than one in five people aged between 45 and 64 have housing costs of more than 30 per cent of their income, compared with just one in 20 back in 1988.

This suggests that a lot of people in what would normally be their peak earning years have little capacity to save for their retirement, at precisely the time when the fiscal costs of an ageing population are becoming increasingly problematic.

- NZ Herald

Brian Fallow

The Economics Editor of the NZ Herald

Brian Fallow is the New Zealand Herald's economics editor. A Southlander happily transplanted to Wellington, he has been a journalist since 1984 and has covered the economy and related areas of public policy for the Herald since 1995. Why the economy? Because it is where we all live and because the forces at work in it can really mess up people's lives if we are not careful.

Read more by Brian Fallow

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