Economics: The good, the bad and the ugly

A study of trends in incomes, inequality and poverty conducted for the Ministry of Social Development last year showed income inequality had increased substantially from 1982 to 2004, but declined from 2004 to 2007, mostly thanks to the Working for Families programme. It remained much the same from 2007 to 2009, when the top 10 percent of the population received 25.7 percent of total disposable household income and (more notably) owned 52 percent of the country’s wealth. Half the population, on the other hand, owned just seven percent of the wealth.
If the have-nots are aggrieved by these disparities, they would not have been mollified by the March-quarter labour cost index. Private sector ordinary time wage rates rose 0.4 percent in the March quarter and two percent in the March year. With public sector and overtime rates included, the annual increase was 1.9 percent. Wage increases therefore were lagging behind increases in the cost of living.
Some economists said people were better off than year ago when tax cuts and lower mortgage rates were brought into calculations. But the workers’ bosses obviously were even more better off, because Business Herald survey among chief executives of the country’s biggest listed firms and state-owned enterprises found they had received an average 14 percent pay rise in the 2010 financial year. Remuneration of the 47 chief executives investigated averaged $1.6 million.
A significantly greater concentration of wealth is to be found among small elite in the United States, where New York Times columnist and economist Paul Krugman has looked back to what happened under Franklin Delano Roosevelt. Income gaps between rich and poor were narrowed through stronger unions, strengthening of collective bargaining, wartime wage controls (imposing floor to wages) and high tax rates on capital. These measures, he says, were followed by unprecedented income and output growth which persisted until the 1970s.
Krugman regards wide gaps as “bad for democracy” and links income inequalities to “the ugliness” of American politics. “You start to get society in which the elite is just not living in the same material universe as the rest of the population. The people who have the most influence are not interested in having good public services, because they don’t use them. You just get bad society.”
Maybe, although his critics note that wealthy people too drive (or ride) over publicly financed roads and bridges, use the courts, enjoy the protection of the police – and so on.
Joseph Stiglitz, another economics professor with Nobel Prize under his belt, has said increasing levels of inequality undermine the efficiency of the economy. He argues that “one big part of the reason we have so much inequality is that the top one percent want it that way”.
Wellington economists Andrew Gawith and Susan Guthrie, in recent newspaper article, looked into those eminent economists’ views on inequality and its effects. They cited an IMF report, published in December, that proposed policies to strengthen the bargaining power of workers and switch from labour income taxes to taxes on capital, such as taxing land, natural resources and excessive profits in the financial sector.
Looking at the New Zealand scene, Gawith and Guthrie said the significant income subsidy provided by Working for Families suggested our current labour market laws and institutions did not deliver the wage levels Krugman and the IMF regard as valuable for lifting output and incomes. But Working for Families has distorted market signals. Low-paid jobs – for example – are more likely to be accepted by older workers with dependents. Their living costs are higher and not normally covered by low wage, but unlike younger workers their take-home pay (thanks to WfF) can far exceed what the employer pays. Relatively inexperienced youth are locked out of the labour market, hoisting youth unemployment rates.
But ensuring families can live with dignity from the wages their employers pay them, instead of having to rely on government income subsidies, may involve giving workers more bargaining power to negotiate an increase in their share of national income.

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

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