This week The New Zealand Initiative published a report The Inequality Paradox: Why inequality matters very though it has barely changed. It follows an earlier report this year Poorly Understood: The state of poverty in New Zealand.
The report is a contribution to public debate. We will contribute further, in part through this blogsite. This is the first contribution. It sets the scene by listing 21 major messages and arguments from our research. They are numbered so as to make it easier to locate future contributions to our main messages.
Putting the two reports together, here are some of the main conclusions from this research. The references in parenthesis are to the Inequality Paradox report, unless otherwise stated.)
- Increased housing costs are hitting those on low incomes hardest, and to a very severe degree. (Figure 28.) Getting more houses built is a critical issue, regardless of economic inequality.
- There is substantial material hardship in New Zealand households. Specifically, around 4% of the population are “doing without” to a severe degree and 11% to a less severe degree. For children the proportions are higher, at 8% and 18% respectively. For the elderly they are lower, at 1% and 3% respectively. The overall proportions are similar to an average for a group of EU countries. (Table 5 of the Poorly Understood report.)
- It is wrong and potentially counter-productive to conflate relatively low incomes with poverty or hardship. Claims that quarter of a million of children or more (25%+) are living in poverty because they are in relatively low income households are gross exaggerations.
- Economic inequality rose markedly from the mid-1980s to the mid-1990s on all three of the main measures: pre-tax market income, disposable income and consumer spending. The share of the top 1% rose sharply in particular. Changes in household structure, socio-demographic attributes, employment outcomes and economic returns could account for perhaps 50% of the rise in disposable income inequality during this period.
- Current income is a poor indicator of hardship. Specifically, only around 40-50% of those experiencing relatively low current incomes are also experiencing hardship, and some on higher incomes are experiencing hardship.One reason is that low income is a temporary situation for a considerable proportion of households, another is that the elderly can be asset rich but income poor.But a real difficulty is that unanchored relative income measures don’t tell us anything about actual living standards, eg poverty. Our Poorly Understood report shows that current welfare benefits are much higher, inflation adjusted, than what was deemed to be an adequate wage for a labourer to earn in order to be able to support a dependent spouse and three children back in 1936. The Ministry of Social Development’s authoritative annual statistical reviews of well-being and inequality show that real income growth has markedly reduced the proportion of households falling below an earlier real income threshold.
- Consumer spending is a better indicator of living standards. More recent Motu research has found that it is also a much better indicator of self-assessed wellbeing.
- Consumer spending inequality rose from the mid-1980s to the mid-1990s, but by 2013 it had returned to around its mid-1980s level, despite the housing cost issue. (Figure 9)
- Contrary to what the public is continually told, disposable income inequality has not trended up since the mid-1990s on the most commonly cited measure (the Gini coefficient). Market income inequality has actually trended down. (Figures 4 and 5.) The paradox is that newspaper headlines featuring inequality have risen more than 8-fold in the last decade.
- Much market income inequality arises from substantial differences in hours of paid work and wage differentials that are related to differences in educational achievement (a proxy for skill) and age (a proxy for experience and responsibility). (Figures 23-27.) What else would we expect?
- The share of top income earners in private income was much higher in the first half of the last century than it is today. A long decline occurred from the 1950s to the late 1980s. (Figure 3.)
- The big rise in the pre-tax income share of the top 1% of income earners in the late 1980s occurred at a time of severe recession, major company collapses and tax reforms that sharply increased the tax take from top income earners overall while reducing the tax rate on the last dollars of their income. (Figures 3 and 10.) It is implausible that the real pre-tax market incomes of this group accelerated upwards during this period. It is plausible that a lot more of their incomes became taxable. The real rise in income inequality in New Zealand could be overstated to some degree for this reason. The (more modest) rise in spending inequality might be a better indicator. Moreover, since the mid-1990s the income share of the top 1% has, if anything, trended down not up. (Figure 1.) Since the early 1990s household income growth has been reasonably proportionately shared on MSD’s calculations. (Figure 8.)
- The proportion of top income earners in New Zealand who are salary and wage earners, has risen in the last decade, contrary to the Thomas Piketty thesis of a growing dominance by the passive income of inherited wealth.
- Our report is dubious about the quality of wealth distribution measures. For a start the measures ignore human capital and the net present value of NZS. But for what it is worth, the wealth share of the wealthiest 1% in New Zealand is not out of line with that in the member countries of the OECD. (Figure 15.) It is actually right at the bottom end of the spectrum for estimates that adjust for the under-reporting of wealth by the richest. (Figure 36.)
- It is ridiculous to attribute the sharp 1988-1991 rise in the share of the top 1% to the decline in unionisation in the years following the Employment Contracts Act 1991
- Our top executives are only paid a small fraction of what top Australian executives and their pay is a lower multiple of worker pay. (Table 1 and text.)
- On the limited evidence available, income mobility in New Zealand is comparable to that in other countries. (Figures 21 and 22.)
- One response to the call that the rich should be “asked” to pay more in tax is that they already do. Indeed, on Treasury numbers the top 40% of households by income are the only ones that pay any income or GST over and above what they receive in return through the welfare system and health and education benefits in kind.
- It is very important that market incomes are fairly earned and are seen to be fairly earned. Anything else corrodes community trust and cohesiveness. There should be a strong presumption against corporate welfare, including bail-outs for bankers.
- Survey evidence for New Zealand suggests that it is widely held that beneficiaries are responsible for their own situation and that high incomes in New Zealand are a reward for talent. (Table 4.) But there is also considerable concern about the degree of economic inequality in New Zealand. (Table 2.)
- Survey evidence globally and in New Zealand also indicates that the public is widely ignorant concerning the degree of economic inequality and that people’s policy preferences tend to reflect their perceptions rather than reality, where there is a difference. (Figure 36.)
- An ongoing public debate about economic inequality is important so that valid concerns are addressed and invalid concerns are identified.
In subsequent blogs we will variously expand on these points, respond to constructive criticisms, and add further points.