Exposing the inequality scam

Dr Bryce Wilkinson
The National Business Review
21 October, 2016

The public is constantly told income inequality is rising and the government should do something. A recent NZ Listener article asserted inequality had risen faster “in recent years” than in almost any other developed country.

One newspaper headline described this country as one of the “worst in the world” for income inequality.

None of this is true. The New Zealand Initiative this week released a report, The Inequality Paradox: Why inequality matters even though it has barely changed, by Jenesa Jeram and myself.

Economic inequality did rise sharply between the mid-1980s and mid-1990s on a wide range of measures. But it has not continued to rise.

On the best available estimates, market income and consumer spending have become more equal from the mid-1990s. Market incomes are incomes from wages, self-employment, interest and dividends.

By 2013, consumer spending was as equally distributed as in 1984. Consumer spending is a better indicator of living standards and well-being than is income for retired people, who are using their retirement savings, and for those who regard their incomes as temporarily high or low.

Furthermore, the Ministry of Social Development’s (MSD) authoritative reports find no evidence of any sustained rise or fall in household disposable income inequality in the past 20 years.

The “worst in the world” headline for income inequality was utter nonsense. Income inequality is similar to that in Australia. New Zealand market incomes are slightly more equally distributed than the average for OECD member countries. Our distribution for disposable incomes is slightly more unequal.

Is globalisation “hollowing out” those on middle and lower incomes while benefiting the rich?

This proposition is not consistent with declining market income inequality. Moreover, MSD’s report shows similar growth in disposable incomes since the early 1990s for those in the middle, and at the top of the 20th and 90th percentile income brackets.

Of course, dollar income gaps increase if incomes grow in equal proportions. But a common error here is to assume that everyone stays where they are. Some do, most don’t.

Treasury research has found that after eight years only 22% are in the same income decile as the one they started in. Income mobility does not seem to be out of line with that in other countries.

What is the paradox? It is that newspaper headlines featuring inequality have risen eight-fold since 2009, despite these statistical facts.

Why? Imported fears from countries where income inequality has continued to rise is one possibility. One concern is of a future dominated by inherited wealth. Another is that rising income inequality reduces economic growth.

On our analysis neither concern fits the facts for New Zealand. Salary and wage earners dominate those earning top incomes. Rising prices for existing houses have been dominating changes in household wealth.

On economic growth, correlation is not causation. From 1988-92, New Zealand experienced its most severe recession since the 1930s. That was not conceivably caused by the contemporaneous sharp rise in measured income inequality. Moreover, if spending inequality has returned to 1984 levels, how much of the rise in income inequality is real?

Misinformed perceptions are another possibility. One survey found New Zealanders thought the wealthiest 1% of households own 50% of the wealth. The actual figure was 18%, the lowest share in a 29 country list.

Advocacy claims that conflate relatively low incomes with poverty in the sense of hardship are another possibility. But MSD’s analysis shows that the overlap is poor. Only 40-50% of households experiencing low incomes are also experiencing hardship. At the same time some households with higher incomes are experiencing hardship. Those who care about hardship should not focus on relative income measures.

A better reason for rising concern is the evidence that higher housing costs are hitting those on low incomes hardest.

Things look grim when housing costs account for more than 30% of household income. On MSD’s (narrow) cost measure, housing costs accounted for only 14% of household income for those under 65 years of age in the mid-1980s. By 2013 it was 20%.

Significant, yes. Painful, probably. But not grim. But for those in the bottom 20% of the income distribution the rise was from 29% to 49%. That’s beyond grim, it is horrific.

But there are other sources of concern. Access to jobs and job insecurity trouble many. Major inequalities in market earnings arise from differences in work skills and hours worked.

Educational qualifications are a proxy for work skills. About three adults have no qualification for every one that has a post-graduate qualification. Far more of the latter are in paid work and their average hourly wage is almost four times higher.

Much market income inequality is due to differences in hours of paid work. Part-time workers constitute 46% of those employed. On average they earn 30% less per hour than fulltime workers.

It is an unpalatable fact that 20-25% of kids live in households with no adult in fulltime employment. The decline in the two-parent family is one factor.

Research suggests about half of the increase in disposable income inequality between the mid-1980s and the mid-1990s could be attributed to changes in household structure, employment outcomes and socioeconomic attributes.

What explains the rest of the increase?

The major tax reforms have had complex effects. Reduced tax avoidance may have markedly increased the proportion of top incomes declared as taxable income and thereby tax paid, despite much reduced top bracket tax rates.

In addition, the introduction of dividend imputation markedly increased top personal pre-tax market income for technical rather than economic reasons.

The bottom line is that exaggerated claims and misplaced perceptions matter if they divert public attention from issues of substance, such as real hardship, housing, education, access to jobs and increasing economic growth.  “Soak the rich” policies cannot solve those problems.

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