Brian Fallow 's Opinion

The Economics Editor of the NZ Herald

Brian Fallow: Rising inequality largely a myth

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Two out of five poor children come from families where at least one adult works full-time or is self-employed. Photo / Getty Images
Two out of five poor children come from families where at least one adult works full-time or is self-employed. Photo / Getty Images

The idea that New Zealand has become one of the most unequal societies in the developed world is just not supported by the data. It is a belief that is in some danger of hardening into received wisdom.

But as Mark Twain said: "It's not what you don't know that gets you in trouble. It's what you know for sure that just ain't so."

The Ministry of Social Development has just updated its comprehensive (200 pages) and careful report, Household Incomes in New Zealand: Trends in Indicators of Inequality and Hardship, to include the results of Statistics New Zealand's 2011/12 household economic survey (HES).

While the report debunks the notion that New Zealand is conspicuous among developed countries for inequality, it is far from providing a defence of the status quo or grounds for complacency.

What it has to say about child poverty and about the impact of housing costs among those on lower-middle incomes, makes pretty sobering reading.

A standard measure of income inequality is a thing called the Gini coefficient; the higher it is, the greater the inequality.

Since the global financial crisis New Zealand's has whipped around - it fell in the latest survey, reversing a jump in the one before - but the trend line through it is flat at a value of 33.

That is similar to the Gini scores of Australia, Canada and Japan, which ranged from 32 to 34, well below the United States' 38 and a little above the OECD median of 31.

Another way of measuring income inequality is to look at the income of the top decile or 10 per cent of households (when ranked by income) and compare it with the bottom decile's.

The average over the past four household economic surveys is that the top decile have received 8.5 times the income of the bottom one, after tax and transfers.

That puts us in the middle of the OECD rankings, and lower than Australia and Canada (8.9 times), Britain (10 times) and the United States (16 times).

The definition of income here is household disposable (or after-tax) cash income from all sources. So it includes transfer payments like New Zealand superannuation, Working for Families tax credits and welfare benefits.

The tax and transfer system dramatically reduces income inequality among the working age population compared with market incomes alone, reducing the Gini score by 22 per cent.

Again, this is similar to Australia (23 per cent) and not much worse than the OECD norm (25 per cent).

One limitation of the HES is that capital gains are not treated as income - though economists would argue that is what they are - but separately as changes in asset values.

As capital gains are more likely to feature among the higher reaches of the income distribution, this is likely to underestimate inequality.

Wealth is distributed more unequally than income.

Those in the top income decile receive about 25 per cent of gross income but those in the top wealth decile have 50 per cent of total wealth.

This puts us between Australia and Britain where the top decile's wealth share is 45 per cent and Germany and Canada (52 and 53 per cent respectively) and well below the US where it is around 70 per cent.

A richer picture emerges when the report turns to housing costs (mortgage payments, rents and rates).

Housing costs amounting to more than 30 per cent of a household's disposable income are counted as high and are often associated with financial stress for low to middle income households, the report says.

In the 2012 survey just over one household in four had high housing costs. It has been there or thereabouts for the past five years, up from one in five in the early 1990s and one in 10 in the late 1980s.

Interestingly it is among the second-lowest quintile or fifth of the income distribution where this indicator of stress is greatest, with 42 per cent having housing costs taking more than 30 per cent of their income and 22 per cent of them more than 40 per cent.

It has risen steeply over the past 10 years, a period which of course captures the mid-2000s housing boom, which was not followed by a bust and has now resumed in earnest.

The proportion of the lowest quintile with high housing costs relative to incomes is lower, at just over one in three, as that group includes older people who have paid off their mortgages and people with subsidised rents.

Child poverty rates have been flat over the past four surveys on all the standard measures, says the report's author, Bryan Perry.

"This is a good result in the circumstances, given the global financial crisis and economic downturn, but the rates are still high relative to other age groups and relative to the 1980s when housing costs were lower relative to incomes."

Among the 217,000 children in beneficiary families (just over one in five), nearly two out of three are counted as poor.

"But two out of five poor children come from families where at least one adult is in full-time work or self-employed," Perry says. "This is an OECD-wide issue - the working poor. The in-work tax credit is really important here for alleviating poverty."

Between the 2008/09 HES and the 2011/12 survey market income for New Zealand households fell 2.6 per cent in real terms, similar to the declines seen in the US, Britain and Australia.

But the net change in median disposable income (after tax and transfers) was a rise of 0.5 per cent over that three-year period as tax cuts and increased New Zealand superannuation compensated for the decline in market income.

It still didn't feel good, of course, compared with the period between the mid-1990s and 2008 when real household incomes rose by an average of 3 per cent a year (boosted by a rise in female participation in the labour force).

But in the context of the global financial crisis and its aftermath it was better than many other countries, which experienced net falls in median income over that three-year period, including Australia, Britain and the US.

"For many OECD countries, lower income households tended to lose more, or gain less, than high income families," the report says.

For New Zealand, however, there was a small gain for bottom-decile households of 1 to 3 per cent and a net fall, of around 8 per cent, for the top decile.

Debate on this article is now closed.

- 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.

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