Economics: Are the poor getting poorer?

Two recent reports obviously were in Labour leader Phil Goff’s mind when he questioned Prime Minister John Key in Parliament about poverty and the rising cost of living. First, the NBR Rich List showed the assets of the country’s wealthiest 150 people had swelled by 20 percent last year. Second, the latest labour cost index showed wages had increased 1.3 percent in the year to 30 June, much less than the 5.3 percent rise in annual inflation (3.3 percent if you shake out the GST impact).
Goff accordingly asked the PM if he stood by his statement that “I think we all have to accept that there is degree of inequality in New Zealand” and, if so, had he read any recent reports on the growing gap between rich and poor in New Zealand?
He was gazumped. Key did stand by that statement. Moreover, he had “excellent news” for Goff: detailed report on income equality had just been posted on the Ministry of Social Development’s website. Titled Household Incomes in New Zealand it shows the degree of income inequality in New Zealand, under standard measures like the Gini coefficient or the 80:20 ratio, has fallen in recent years. It further shows the distribution of income in New Zealand is more even now “than it was at any time under the previous Labour government”.
In other words, the gap between rich and poor was narrowing.
As for the Rich List, Key noted, it is “a list from bunch of journalists, who are making up stuff on the best estimates they have”. And the labour cost index was not the best measure of wages increases. The Labour government, don’t forget, had changed the law in 2001 to ensure the quarterly employment survey was used as the basis for superannuation in New Zealand. In the year to June, it showed average weekly earnings up 4.2 percent, or 7.4 percent in after-tax terms.
The household incomes report provides information “on the material wellbeing of New Zealanders as indicated by their household incomes from all sources over the period 1982 to 2010”. Using household after-tax cash income for the previous 12 months, adjusted for household size and composition, its major focus is on trends in income-based indicators of inequality and hardship. All results are estimates, based on data from Statistics New Zealand’s Household Economic Survey (a sample survey of around 2800 to 3200 private households). The latest income data are from the 2009-2010 HES, before the Key Government’s income tax cuts and increase in GST took effect from 1 October.
Among the findings:
• There was little change in real terms for household incomes for most income groups from the 2009 HES to the 2010 HES.
• From the low point in 1994 through to 2009 there was steady rise in the median income in real terms, with different income groups faring differently at different times.
• From 2004 to 2007 the Working for Families package led to incomes below the median growing more quickly than incomes above the median – the only period in the last 30 years in which this has happened.
• Wealth is distributed much more unequally than income.
• The proportion of households with high OTIs (outgoings to income) was little lower in 2010 (25%) than in 2007 (27%) and 2009 (28%) , but much higher than in 1988 (11%).
High OTIs are of particular concern for low-income households because they can show insufficient income left to properly meet other basic needs such as food, clothing, transport, medical care and education.
But the report cautions there is some uncertainty about the reliability of OTI figures for lower quintiles for 2010. Its authors are holding off commenting on OTI trends until 2011 data are available. The rest of us probably should do the same. M

Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.

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