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    Rich and Poor in NZ
    Latest research on income and in

    from The Jobs Letter No.83 / 30 July 1998

    Professor SRIKANTA CHATTERJEE (Massey University) and NRIPESH PODDER (University of New South Wales) have been able to apply a more sophisticated technique to examining New Zealand household income data to ascertain how household income distribution has altered over the period 1983/84 through to 1995/96. For the first time, Statistics New Zealand has permitted the researchers to use unit record data from three surveys from the Household Economic Survey (HES). The findings of their paper throw new light on several aspects of household income distribution in New Zealand over a period when the economy was subjected to a controversial reform process.

    In this special feature, The Jobs Letter presents some edited highlights from this research:

    Starting in 1984, the New Zealand economy has experienced extensive reforms affecting every major sector. Although a definitive verdict on the reform programme to date is yet to be delivered, it is frequently hailed as a successful experiment which offers many useful lessons for other countries facing a policy quandary similar to New Zealand's in the early 1980s.

    However, the question as to who benefited how much from the reform measures is one that has not, as yet, been adequately addressed. A major test of any economic policy measure is how it affects the size of the "national cake", i.e. the nation's real income, and its growth rate. A second, related, test is how it affects the manner in which the "cake" is divided up amongst different groups in society.

    The research findings document that income inequality has increased sharply over the period, confirming the findings of some other researchers (Rowntree 1995, Saunders 1994). While it is difficult to connect directly the economic reform measures used in New Zealand with the observed deterioration in inequality, the possible channels through which policy-induced changes in the economy might have been transmitted to the distribution of the "national cake" can be, and have been, identified in this research.

    The sharp increase in unemployment over the latter part of the 1980s and early 1990s while, again, not a direct cause of increased inequality, has certainly contributed to the process. Likewise, the distortions in the financial markets, which saw the nominal interest rates soar to unprecedented levels in the later 1980s and early 1990s, resulted in changes to household incomes in a way that, again, contributed to the increased inequality.

    More significantly, perhaps, the drastic cuts in the welfare benefits put in place in 1991 despite being directed towards the poor somewhat better, failed to stem the tide of rising in equality overall because of the inadequacy of the transfers. The somewhat more stringent eligibility requirement for New Zealand superannuation, likewise, helped minimise the equalising impact of this component of income.

    It is indeed a spectacular, if somewhat ironic, finding of this research that the bottom 80 percent of New Zealand income earners suffered a reduction in their share of the total incomes paid out, while the top 5 percent enjoyed a 25 percent gain after twelve years of painful restructuring.

    There are, no doubt, other aspects of the story of New Zealand's household income distribution that need addressing. The policy implications stemming from the findings also need careful examination. Meanwhile, the verdict on how well-off New Zealanders are after all the recent economic changes must remain an open issue.

    In order to gain an overview of the trend of income inequality in New Zealand over the period 1983/84 - 1995/96, we first present Table 1 and Table 2 which contain the decile shares of incomes and the Gini coefficients in different survey periods. (The Gini coefficient of total income measures the overall degree of inequality).

    The shares have been computed by arranging the households in ascending order of income per member. The deciles here represent ten percent of the population, and not ten percent of the households. While the first table shows the actual decile shares, the second table gives the cumulative shares. In the bottom row of the first table are presented the values of the Gini coefficient for each of the surveys.

    The Trends in Income Inequality in NZ
    Decile Shares
    ..... 1983/84 1991/92 1991/92
    Lowest 2.05 1.63 1.71
    Second 4.25 3.87 3.73
    Third 5.45 5.15 4.82
    Fourth 6.56 6.27 5.79
    Fifth 7.57 7.37 6.88
    Sixth 8.85 8.55 8.26
    Seventh 10.55 10.29 10.09
    Eighth 12.94 12.85 12.61
    Ninth 16.16 16.62 16.47
    Top 10% 25.62 27.39 29.61
    Top 5% 15.28 16.97 19.04
    Gini Coefficient 0.353 0.382 0.404

    TABLE Two
    Cumulative Decile Shares of Incomes
    Decile Cumulative Shares
    ..... 1983/84 1991/92 1991/92
    Lowest 2.05 1.63 1.71
    Second 6.35 5.50 5.44
    Third 11.80 10.65 10.26
    Fourth 18.36 16.92 16.07
    Fifth 25.93 24.29 22.93
    Sixth 34.78 32.84 31.19
    Seventh 45.33 43.13 41.28
    Eighth 58.27 55.98 53.89
    Ninth 74.43 72.60 70.36
    Top 100.00 100.00 100.00

    These figures clearly show that inequality of household incomes in New Zealand has been on the rise over the period as indicated by the rising value of the Gini coefficient over the period. While the Gini co-efficient may experience significant changes over a very long period of time, a rise in the coefficient from 0.353 to 0.404, an increase of over 14% within a span of twelve years, is indeed spectacular.

    Looking at the decile shares, we find that there is a secular decline in the shares of the bottom eight deciles of the households. While the share of the ninth decile has remained steady, the share of the top decile has increased spectacularly. The picture becomes even more dramatic when we look at the share of the top 5% of the households whose share has increased by more than four percentage points, representing an increase of nearly 25% over the span of twelve years. Overall, it is clearly evident that, while for the poorer eighty per cent of the population, the share has steadily declined, for the richer five and ten percents, the shares have markedly increased. It is noticeable too that the declines in the lower declines are proportionately larger than those encountered as one goes up the income ladder.

    Whereas most other OECD countries have also experienced increased income inequalities in the 1980s, New Zealand seems to have experienced a particularly strong and rising tide of inequality over the dozen years studied here. It transpires that New Zealand's economic reform programme over the period 1984-96 saw the very rich becoming even richer, while the bulk of the rest of the population became poorer, in relative terms, with the poorest faring the worst.


    Changes in Relative Shares of Major Income Components (percentages)
    Components 1983/84 1991/92 1991/92
    Earned Income 78.55 71.75 75.62
    Unearned Income 8.25 10.75 10.38
    Government Benefit 13.20 17.52 14.00
    Total 100.00 100.00 100.00

    In order to explore the sources of this rising trend, we turn next to an analysis of the changes in the components of the total incomes of households, and their relationships with the trends in the overall income inequality over time.

    To begin with, we consider only three broad categories of income: earned income, investment income and government cash benefits.

    Earned income consists of income from wages and salaries, and from self employment. Unearned income is income from all other sources except government transfers. It consists mainly of the incomes generated from assets and various other avenues of investment. The main components of government cash benefits are the various types of pensions and unemployment benefits. The age-pension constitutes the major part of government benefits, by far. The changes in the relative shares of these three components are presented in Table 3.

    The share of earned income had declined by nearly 9 percent between 1983/84 - 1991/92, but then recovered somewhat over the next four years to, still, stand at 3 percentage points below its 1983/84 value. A substantial part of the explanation for these changes must lie in the changes to New Zealand's unemployment record. Over the period 1984-92, unemployment in New Zealand was on a sharp upward trend, despite a slight easing of the trend in 1985/86. This would have caused the proportion of households with nil earned income to increase sharply too.

    From 1992 onward, as growth returned to the New Zealand economy, unemployment started to decline, and the official unemployment rate fell back from its peak of 11.1 percent in March 1991 to around 6 percent in March 1996. This reduction in the number of unemployed in the population helped raise the share of earned income between 1991/92 and 1995/96, but, clearly, not enough to take the share back to its 1983/84 level when the official unemployment rate was less than 4 percent.

    The share of unearned income first rose by about 20 percent over the eight years 1983/84 -1991/92, and, then, fell slightly by 1.3 percent over the next four years to 1995/96. A major influence on this pattern of change in unearned income must be the behaviour of the nominal interest rates in New Zealand over the period. The latter half of the 1980s saw the inflation rate accelerate, and, with it, the rates of interest. This would have helped raise the share of investment income over the period 1984-92. As inflation started to ease since the early 1990s, so did the interest rate in nominal terms. By 1995/96, the annual inflation rate was brought down to around 2 percent; interest rates (and other returns on assets) had declined too. This is reflected in the reduced share of investment income over the four years to 1995/96. Its relatively small decline is due also to the fact that income started to rise again over the latter period, after a period of virtual stagnation of the New Zealand economy in the later 1980s.

    The share of government cash benefit went up sharply from 1983/84 to 1991/92, but fell back over the next four years. The increase in the earlier period would again be related to the increased unemployment over the period alluded to before. But there were other factors as well: the number of elderly, pensionable age, people increased steadily over the period as well. Thus, while in 1984, there were around 451,000 people receiving New Zealand superannuation, by 1995, the number had increased to over 469,000, despite the government decision to gradually raise the qualifying age from 60 to 65 years by 2001.

    Likewise, the number of solo parents, receiving domestic purposes benefit, nearly doubled over the period from 53,000 to 104,000, and the number of sickness beneficiaries rose from 9,400 to over 34,000, putting upward pressure on the total government spending on welfare benefits. Some of these changes, it might be argued, are attributable, at least in part, to the dramatic increase in unemployment over the period.

    Source from "Sharing The National Cake In Post Reform New Zealand: Income Inequality Trends In Terms Of Income Sources" by Nripesh Podder (University of New South Wales) and Srikanta Chatterjee (Massey University). Paper prepared for presentation at the Annual Conference of the New Zealand Association of Economists, Government Buildings, Wellington, 2-4 September 1998.

    The full paper by Chatterjee and Podder can be downloaded from the Massey University website at
    The file is in a pdf format which requires an Acrobat reader, also available freely from the internet.

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