The New Zealand Institute
| Grade | NZ Rank | Trend | Latest Value | 2015 Target | |
|---|---|---|---|---|---|
| D | 25th of 34 | Equal | Gini value 0.33 | 0.31 | Hardship high among our children |
The intent is to assess New Zealand’s progress in relation to Franklin D. Roosevelt’s challenge in his second inaugural address in 1937 that, “The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.”
Having too little is often understood to mean that one cannot meet basic needs like food and housing. Such deprivation may not be as useful a yardstick for advanced economies because there are few truly impoverished people in the community, so income inequality is the measure. Income inequality is a measure of relative deprivation, representing the gap between the richest and the poorest, or the size of the distribution range in incomes.
The Ministry of Social Development’s The Social Report 2010 says that income inequality is often regarded as an important aspect of the fairness of a society and a high level of income inequality may be detrimental to social connectedness.
An International Monetary Fund (IMF) Working Paper, Inequality, Leverage and Crises, concludes that increased income inequality can increase vulnerability to financial crises. The paper describes a mechanism where high income households’ additional income passes through to other households by way of loans, enabling the latter to sustain consumption levels at least for a while. But without a recovery in incomes for poor and middle income households over a reasonable time horizon, the loans keep growing, along with the probability of a major crisis in the economy.
Several measures can provide an indication of how equal or unequal the distribution of wealth or income is within a society. Many involve complex calculations and are not intuitive measures. The Gini value has been chosen because it is widely used and has an extensive dataset that includes many countries. The important thing to understand about the Gini is that lower values reflect greater equality and a more even distribution of income, and a zero value would mean perfectly equal income distribution.
Hardship is also used as a measure of relative disadvantage. The Ministry of Social Development identifies poverty or material hardship, in the context of richer nations, as where “a person has a day-to-day standard of living or access to resources that falls below a minimum acceptable community standard. In contrast ‘absolute’ poverty refers to very basic minimal needs, such as food and shelter, which a person requires just to survive.”
Hardship is by definition undesirable in a society, whereas some inequality can be beneficial. Inequality can provide incentives to aim higher and work harder. Too much inequality however may lead to unhappiness, frustration and stress. There is a legitimate debate about what is the appropriate level of inequality in a society.
The Spirit Level: Why Equality is Better for Everyone was published in March 2009. Using a series of measures to compare the conditions of different countries and US States, the authors Richard Wilkinson and Kate Pickett argued that more unequal societies are bad for almost everyone within them - the well-off as well as the poor. They showed that increased levels of inequality lead to an intensification of a whole range of social ills which affect everyone in society. The book has provoked much attention and discussion. Many are critical of it, particularly about aspects of the methodology used. The authors have sought to address some of the criticism via a 2010 postscript to their book.
Figure 1 shows the Gini value for OECD countries in the late 2000s with the lower and more equal Gini values at the top of the vertical axis. The OECD average value is 0.313 and New Zealand has a value of 0.330 making it less equal than most, at 25th of 34 OECD countries. Updated Gini values are not available for all OECD countries so a more recent rank for New Zealand is not available. The OECD’s Society at a Glance 2011: Social Indicators in Figure EQ1.1 identifies New Zealand along with the Czech Republic, Finland and Sweden as the countries experiencing the strongest rises in inequality since the mid-1980s.
Figure 2 shows New Zealand’s Gini value over time. New Zealand had a much more equal distribution of income in the 1980s. Incomes became less equal over the 1990s and early 2000s and then started to become more equal. The improvement in income equality between 2009 and 2010 reflected a decline in real incomes for the top two deciles (lower investment returns following the Global Financial Crisis) and a small real gain on average for lower-income households. The 2010 Gini value of 0.309 is close to the 1994 level but incomes remain much more unequal than they were in the 1980s.
Figure 3 shows the proportion of the population experiencing hardship by age group. The highest incidence of hardship is among children (under 18 years) and the lowest incidence among people aged 65 or over. Hardship is defined by a specific set of deprivations where a household is forced to forgo goods that are considered necessary for a basic or minimal acceptable lifestyle. The European Union has adopted a 9-item deprivation index as one of its primary social inclusion indicators. The index comprises the ability to keep a home adequately warm; a meal with meat, fish or chicken every second day; a phone; colour television; washing machine; private car; one week’s annual holiday away from home; the ability to pay mortgage, rent and utilities on time; and the ability to face unexpected expenses which for NZ is set as $1,500.
Data on hardship based on the same requirements for a minimum acceptable lifestyle has been collected for 27 European countries, providing a view of hardship in the New Zealand relative to these countries. The motion chart on the NZahead website can be used to compare New Zealand’s hardship rates for the overall population and for various age groups with European populations. Having a lower rate of hardship and being ranked further to the right is preferable. As you change the age group selection on the Y (vertical) axis, you can see how New Zealand’s age groups experience hardship with a higher or lower incidence than for that age group in other countries.
The figures in the motion chart reveal that New Zealand’s children suffer not only a higher rate of hardship than other New Zealanders, but a greater share of New Zealand’s children face hardship than in many other countries. New Zealand’s older population faces a low rate of hardship relative to the other New Zealand age groups and relative to the same age groups in other countries.
Having almost one in five children facing hardship is a situation that should be improved. The comparison to other countries shows New Zealand is unusual in imposing such a burden on the youngest segment of the population.
Income inequality also affects ethnic and gender groups differently. The Human Rights Commission’s Human Rights in New Zealand 2010-Summary (p.16) identifies that international treaty bodies have repeatedly expressed concern about inequalities in New Zealand. The most recent report of the Committee on Economic Social and Cultural Rights commented on the persistent inequalities between Māori and non- Māori in educational participation as well as the gap in employment conditions between men and women, particularly in the area of pay equity.
Better educated people with higher levels of skill earn higher incomes. The New Zealand Income Survey: June 2011 quarter shows that average weekly income from all sources for people aged 15+ was $703. However this varies markedly by ethnicity. The incomes of Pacific peoples, Asian and Māori are on average 64%, 74% and 75% respectively of the average European weekly income ($752).
Despite worthwhile progress towards economic equity for women in New Zealand, the gender pay gap persists at 9.6%, the lowest level since 1997 (New Zealand Income Survey: June 2011 quarter). There is variable evidence of progress in implementing pay and employment equity response plans in the state sector and no transparency around addressing pay and employment equity issues in the private sector (Human Rights in New Zealand 2010-Summary, p.66).
Figure 4 comes from The Spirit Level: Why Equality is Better for Everyone (p.20), and plots income inequality against an index of health and social problems. The index is made up of the measures: level of trust, mental illness, life expectancy, infant mortality, obesity, children’s educational performance, teenage births, homicides, imprisonment rates and social mobility. Each item in the index carries the same weight. The figure shows that poor health and social problems occur less frequently in more equal societies. Compared to other countries New Zealand has greater income inequality and more health and social problems. Professor Richard Wilkinson, co-author of The Spirit Level, told the Sunday Star-Times (Wealth gap divides nation article, 23/1/2011) that while New Zealand may have traditionally thought of itself as an egalitarian society, it was no longer so.
While there are policies aimed at reducing poverty and hardship, there are fewer policies addressing equality. There is no specific reference in New Zealand law to equality, something the United Nations Committee on Human Rights has consistently criticised when assessing New Zealand’s compliance with international standards on equality and freedom from discrimination (Human Rights in New Zealand 2010-Summary, p.16).
In 2005 Working for Families was introduced to help low and middle income families by providing extra financial support. This programme is credited with improving the situation for children in families with working parents, but there is no programme to provide similar benefits to children in households receiving income primarily from benefits, with no working parent.
The United Nations Committee on the Rights of the Child (56th session) notes that while the extent of child poverty has declined in recent years, it remains concerned that about 20% of children in New Zealand are living under the poverty line. An August 2011 report by Infometrics for Every Child Counts, identified that New Zealand has one of the lowest rates of public investment in children in the OECD and the cost of poor child outcomes is around 3% of GDP.
Both the Child Poverty Action Group (CPAG) and the recent Tax Working Group note that benefits and tax programmes are not well coordinated, making families face poorly structured incentives as a result. However it does not appear that there will be a joint review of tax and benefit programmes. The Welfare Working Group suggested some changes in beneficiary assessments that might increase inequality particularly for children but these may or may not be adopted as government policy.
On 2 June 2011 the NZ Council of Christian Social Services launched Closer Together Whakatata Mai as a way of highlighting the impact of inequality, especially income inequality, for New Zealand with a view to encouraging political parties and government agencies to develop or support policies that promote equality.
In summary there are lots of calls for action to be taken but little evidence of policy initiatives or programmes that address income inequality.
New Zealand is ranked in the bottom third of the OECD for income inequality. Income inequality as measured by the Gini value reduced between 2009 and 2010 due partly to reduced investment income for high decile households. However incomes remain much more unequal than during the 1980s.
New Zealand has large and persistent income differences between ethnic and gender groups. There are also an unacceptably large number of children experiencing hardship. The choice to favour investment in other segments of the population over children will have adverse consequences for New Zealand in the future. Insufficient response to this very unsatisfactory situation contributes to the overall grade of D.
A target Gini value of 0.30 would place New Zealand at the average for the OECD.
“The Gini coefficient is a statistical measure of inequality and ranges between 0 and 1. In a state of perfect equality, where every person has the same household income, the Gini coefficient would be 0. In contrast, in a state of complete inequality where only one household receives income, the Gini coefficient would be 1. An increase in the Gini coefficient indicates that income has become less equally distributed. Gini coefficients are a common summary measure in the literature on income distribution.” (Crawford and Johnston, Treasury Working Paper 04/20)
The Y (vertical) axis is the cumulative income of people arranged from lowest on the left to highest on the right. The top value on the far right represents the total income of the country. If income was distributed evenly, with everyone earning exactly the same amount, the graph would show a line running up the chart at a 45 degree angle. If, however, there were variations in income, the line would first move at a slope of less than 45 degrees while accumulating the incomes of those earning the least, then increase at a slope of more than 45 degrees when adding the incomes of those who earned more. The smaller the area marked A, the closer the line is to the perfectly equal 45 degree line and the lower the Gini value.
Figure 1: OECD (2011). Society at a Glance: OECD Social Indicators, Income inequality, Gini coefficient of income inequality, retrieved 18 April 2011 from http://www.oecd.org/document/0,3746,en_2649_201185_46462759_1_1_1_1,00.html.
The year of data collection varies by country. 2004 - Greece; 2004/5 – Switzerland; 2006 – Chile, Japan; 2007 – Austria, Belgium, Canada, Czech Rep., Denmark, Estonia, Finland, Hungary, Iceland, Ireland, Luxembourg, Poland, Portugal, Slovak Rep., Slovenia, Spain, Turkey, UK; 2008 – Australia, France, Germany, Israel, Italy, Mexico, Netherlands, New Zealand, Norway, South Korea, Sweden, USA.
Figure 2: Ministry of Social Development (2011). Household Incomes in New Zealand: Trends in indicators of inequality and hardship 1982 to 2010, retrieved 9 August 2011 from http://www.msd.govt.nz/about-msd-and-our-work/publications-resources/monitoring/household-incomes/index.html.
Note: The Gini value used is Before Housing Cost and differs from the reported latest value for this measure because that value is calculated to enable comparison to other OECD countries. In addition the Gini value in Figure 2 differs from Figure 1 as the OECD uses a different equivalence scale that treats children as costing the same as adults.
Figure 3: Ministry of Social Development (2009). Non-income measures of material wellbeing and hardship: first results from the 2008 New Zealand Living Standards Survey, with international comparisons, Table E2.6, retrieved 24 September 2010 from http://www.msd.govt.nz/about-msd-and-our-work/publications-resources/monitoring/living-standards/living-standards-2008.html.
Figure 4: Wilkinson, R. & Pickett, K. (2009). The Spirit Level: Why Equality is Better for Everyone, retrieved 23 January 2011 from http://www.equalitytrust.org.uk/node/325.
Further information links for income inequality
Roger Kerr (2010, December) critique of The Spirit Level available at http://rogerkerr.wordpress.com/2010/12/22/the-spirit-level/.
Nathan McLellan (2011, July). Guest book review of The Spirit Level for the Maxim Institute, available at http://www.maxim.org.nz/files/pdf/Spirit%20Level%20Book%20Review.pdf.
International Monetary Fund Working Paper WP/10/268 (2010, November). Inequality, Leverage and Crises, available at http://www.imf.org/external/pubs/ft/wp/2010/wp10268.pdf.
ShareThis