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Why conflating relatively low incomes with poverty or hardship is unhelpful

Point 3 of our 21-point blog on inequality asserted that it is wrong and potentially counter-productive to conflate relatively low incomes with poverty or hardship.

This blog uses the following two sentences from Max Rashbrooke’s recent critique of our Inequality Paradox report to elaborate on this point:

“… one fifth of the population (on one standard measure) is in relative poverty even before housing costs are taken into account. And that poverty occurs in a wider context of how income is distributed and redistributed, of incomes barely increasing over 30 years for the poorest while doubling for the richest.”

The first sentence illustrates a tendency in New Zealand debate to define low relative income as relative poverty, and then to cherry pick from the range of plausible thresholds so as to maximise the proportion of the population in relative poverty.

Specifically, the highest proportion of the population in 2015 below the various income thresholds in Table F.3 of the Ministry of Social Development’s August 2016 household incomes assessment is 18%. It represents the proportion of the population in households whose equivalised disposable income in 2015 was less than 60% of the median household equivalised disposable income. The lowest proportion in the table for 2015 is 6%.  So Rashbrooke’s “one-fifth” figure has apparently picked the biggest proportion and rounded it up.

The first three words in the second sentence conflates low relative income with material poverty or hardship. Well, according to Table D.11 of MSD’s August 2016 wellbeing report, the proportion of New Zealanders experiencing “more severe” hardship on the European Union’s measure was 4%. That can’t be rounded up to 20%.

There are at last four problems with the remainder of the second sentence.  First, and this point is relatively minor, it may ignore MSD’s warning in note (1) of table 9.2 in its incomes report that income measures for the lowest income decile are too unreliable to use to assess income trends for such households.

Second, it ignores the reasons enumerated in section 1.2 of our report for doubting the robustness of the magnitude of the measured rise in top market incomes during the deep recession from 1988-1992.

Third, it ignores entirely MSD’s point, replicated in Figure 8 of our report, that economic growth has increased incomes at the 90%, 50% and 20% levels in similar proportions since the end of that recession.

Fourth, it invites the reader to assume that those under the 60% threshold have stayed there for the last 30 years, while those in the richest households have done the same.  This is patently not generally the case. People age over 30 years and incomes change with age.  Figure 27 illustrates this. Median hourly earnings rise markedly from 15-19 years of age to 40-44 years.  After that the median declines.  The (low) earnings of those who were 15-19 year olds 30 years ago will now be the higher ones indicated in Figure 27 for 45-49 year olds. The high income earning 40-44 year olds 30 years ago will now be long retired. Income mobility is considerable over much shorter periods. Figures 18-21 in our report show substantial movement upwards movement from the bottom deciles in periods as short as 4 or 7 years.

Because of upwards mobility, a more reasonable expectation would be that on average those who were in the lowest income households 30 years ago will have seen considerable growth in their real income from paid work whereas the real incomes from paid work of those who were 40-44 year olds 30 years ago will have widely dropped to zero.

Seen from this perspective, the wider the gap between the earnings of those aged 15-19 and those aged 45-49, the greater the growth in earnings from paid work the average person aged 15-19 might expect over the next 30 years. Future rewards from gained work experience and learnt skills are not obviously to a young person’s disadvantage.  Nor does a lower income on retirement obviously disadvantage an older person.  Its what most of us expect and plan for.

These are some of the reasons why point 5 of our 21-point blog is that current income is a poor indicator of hardship. If hardship is the concern, look elsewhere.

There are at least two policy concerns about equating low incomes relative to the median disposable income with poverty. One is that it tells politicians and the public that transferring income from those on median incomes upwards will reduce material hardship even if those on lower incomes get no income boost. Brian Easton identified that problem in point 21 of his useful Users Guide.

A second concern is that policies that raise the disposable incomes absolutely of those who have been defined as living in poverty will give money to many who are not experiencing material hardship and fail to give money to many who are.  MSD’s 2016 wellbeing report (Section H, page 71) describes the overlap between the income poor and the materially deprived as “modest”. This is the source of the 40-50% overlap estimate in point 5 of our 21-point blog on inequality.

So what is our final take on this?  First those on relatively low incomes are not necessarily in strife and those on higher relative incomes are not necessarily free from strife. Much depends on circumstances. Second, poverty is a loaded term. It invokes connotations of real need and an imperative that something must be done. Those who define it in a way that abstracts from serious hardship risk discrediting their cause and diverting policy attention away from serious hardship. Defining poverty in a way that means it can’t be reduced by inclusive economic growth also invites incredulity.

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