The inequality paradox: why inequality matters even though it has barely changed

Income distribution Poverty Household finance Wage inequality Financial inclusion New Zealand

The public is constantly told income inequality is rising and the government should do something. This report seeks to explain why inequality matters, even though it has barely changed. It shows how income inequality did rise in the late 1980s and early 1990s, but has since flattened out. Meanwhile consumer spending inequality has returned to mid-1980s levels. Even so, higher housing costs have probably exacerbated wealth inequality. There is considerable income mobility in New Zealand, but it’s hard to tell whether it’s rising or falling, based on the available data.

But isn’t the real issue that the gap between ‘the haves’ and the ‘have-nots’ is unfair? The report addresses this issue.  A striking 72% of Kiwis believe that wealth is deserved and perceived to be legitimate in the sense of coming from individual talent and efforts. The New Zealand Initiative and every decent person should care deeply about eliminating all forms of injustice in our society. This report tries to sort out some of the facts to help us better identify where that injustice lies. 

Key findings

  • It is a myth that income inequality, as most commonly measured, is progressively rising in New Zealand. On the Gini measure for household disposable income, adjusted for differences in household composition, income inequality rose markedly from the late 1980s to the early 1990s, but it has not trended up since the mid-1990s. Moreover, some of the earlier rise may be illusory, reflecting a changing balance between taxable and non-taxable incomes. Income inequality in New Zealand prior to the mid-1980s was understated to this extent.
  • On the Gini measure, consumer spending in 2013 was as equal as in the mid-1980s.
  • It is a myth that economic growth must increase economic inequality everywhere. While globalisation has markedly reduced global income inequality, it has also increased income inequality within many of the world’s most prosperous countries.
  • Globalisation and technological changes have increased the labour income of top income earners, particularly in Anglo-Saxon countries, including those in New Zealand.1 Nevertheless, top salary and wage incomes in New Zealand are modest relative to international norms. Broadly speaking, globalisation has put downwards pressure on the relative incomes of those in the bottom half of the population in prosperous countries. This is a threat to social cohesion. ƒ It is a myth that the increased income share for top income earners in New Zealand is due to a growing share of investment income in national income due to accumulating concentrated wealth. Increased labour income has been the main driver.
  • The rise in the ratio of private wealth to GDP in New Zealand is not evidence in support of Piketty’s thesis that the real capital stock will rise faster than real Gross Domestic Product (GDP). The real stock of capital in New Zealand has not grown faster than GDP. The private wealth ratio has instead risen because of the alarming increase in house prices.
  • In general, incomes peak in middle age and wealth peaks at retirement. These sources of inequality are natural.
  • On the limited evidence available, income mobility in New Zealand is comparable to that in other prosperous countries.
  • The funding of government spending, in particular of benefits for the bottom six deciles of the household income distribution, currently depends critically on getting a high net tax take from those in the top four deciles.
  • Current research indicates that the taxable income of top income earners is very responsive to the top income tax rate. Higher tax rates on top incomes may produce disappointing outcomes if greater tax revenue is the goal.
  • The sources of income inequality matter. A degree of income inequality is inevitable given inequalities in educational attainment, the proportion of the adult population without paid work, the number of paid hours worked, and employment experience (age).
  • Household formation and structure matters. On the evidence, perhaps half the increase in household disposable income inequality from the mid-1980s to the mid-1990s reflects this.
  • Higher housing costs hit those on lowest incomes hardest. In current circumstances, public policies relating to housing are important whether the concern is inequality or deprivation.
  • Corporate welfare and regulations that appear to protect incumbents are a potential threat to public confidence that high market incomes are justifiable. There should be a presumption against such policies.

This report is the second of three reports. The first report was Poorly Understood: The State of Poverty in New Zealand. It argued that issues of hardship were more important than issues of inequality, or low relative income. The third report, to be released in 2017, will examine welfare policy issues.

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