Income and wealth inequality unchanged by last Labour government

Posted: July 5, 2011 by Nick Scullin in Economics, Labour Party NZ, New Zealand history, New Zealand politics, Poverty & Inequality, Workers history

The article below was written in 2006 and provides a useful snapshot of the lack of growth of workers’ incomes, and the widening of inequality, under the last Labour government.

One of the most noticeable features of economic discussion in New Zealand today is just how little of it there actually is. On radio and television news bulletins and in the business pages of the newspapers, the “business news” is largely confined to sound bites about international and local businesses or reports on how a particular sector is performing, followed by an update on share prices and exchange rates. What actually underlies economic decisions and what their impacts are, especially on workers, is rarely considered worthy of analysis. We hear good news stories about businesses engaging in successful export ventures or bad news stories about companies relocating their production offshore with accompanying job losses but, again, there is no analysis of what this really means or discussion of why this really happens, and since the government has abdicated any responsibility for any of this, we are left at the mercy of those who do make these decision, the “business community”.

Income and wealth distribution

Income distribution in New Zealand is typical of a developed capitalist country, meaning that the differential between the richest and poorest is large and this trend is increasing.  This tendency is researched by Government Departments, including Treasury and the Ministry of Social Development. Income Growth and Earnings Variations in New Zealand 1998 – 2004, a report by two Treasury staff, Dean Hyslop and Suresh Yahanpath, comparing income distribution (in 2004 dollars) from 1998 to 2004 reveals the following:

The report’s conclusion is that in a period of little major policy (as opposed to the period from 1984 into the 1990s when the fourth Labour government radically restructured the economy with its massive increases in social dislocation and inequality, followed by the National Party’s taking up of the same reins, introducing the Employment Contracts Act, and slashing benefits), there is little change in income distribution. The report says:

“The main contributors to the observed changes appear to be employment and real wage growth. We also find that the relative employment and wage contributions have varied across the distribution: income gains at the lower end of the income distributions have been largely driven by employment, while changes at the higher end have been driven by wage gains.”

So, while a fall in unemployment is obviously an objectively good thing, the implication of this is that the small increase in income for the lowest decile – $14 a week over 6 years or about $2.30 a week each year or about $50 a week or under $9 each year for the 25th percentile – is attributable to people now having work, rather than by rising wages. Anyone who believes that the Labour Party has any interest in actually doing anything significant about income disparities might want to think again. These figures will improve when data for the years following the introduction of Working For Families becomes available although this will have little impact on the lowest incomes as beneficiaries are not eligible for this programme. The other high profile Labour policy of this year, Kiwisaver, will also do nothing for beneficiaries and Michael Cullen has advised employers that they will be able to use their Kiwisaver contributions as an argument against wage increases in the future.

Another look at the state of income distribution comes from the Ministry of Social Development’s Social Report 2006, which graphs the difference in disposable income between a household (adjusted for size and composition) on the 20th and 80th percentiles. The table reveals that for the period 1988 – 2004, income disparity increased most rapidly from 1988 – 90, the latter part of the term of the 4th Labour Government. Disparity plateaued through the early nineties before beginning to climb again through the mid to late nineties and beyond. In 1988, the ratio of 80th to 20th percentiles was less than 2.4. By 2004, it stood at 2.8, the highest it has been throughout the time studied.

So if this is the situation with income disparity, what is the situation with wealth ownership? Wealth Disparities In New Zealand, a newly released report from Statistics New Zealand’s Survey of Family, Income and Employment (or SoFIE) presents an analysis of this using 2004 figures:

Some points become immediately obvious. Firstly, looking at Quintile 1 (the fifth of the population with the least net wealth) there is a significant group whose net wealth is negative. This can partly be explained by age, young people are unlikely to have acquired many assets but may have student loans, (and this will relate in part also to age) partly by the fact that people who have bought houses will have mortgages greater than their equity in the property. This latter will become less significant as home ownership rates continue to decline in New Zealand, an issue I won’t go into. What is more serious is that a large group of people who have little or no net worth and are renting.

The median wealth figure is $69,800, so half the population possess wealth above this figure and half own wealth below it. One third of the population are concentrated in the range from $0 – $40,000.

Looked at on a second graph, more information becomes evident.

The Lorenz Curve gives a visual representation of the degree of inequality in society. A society with perfect equality of wealth distribution would appear on the graph with the 45% diagonal line, ie the population percentage would equal the wealth percentage at all points. The further the Lorenz Curve deviates from that diagonal line, the greater the degree of inequality. To put some specific numbers to the graph, the top 10% of the population currently own 51.8% of total wealth (the top 1% owns 16.4% of the total.) At the other end of the scale, the bottom 50% of the population controls a grand total of 5.2% of the country’s total worth. Historically, this represents a trend towards greater inequality over time. In 1951, the top 10% owned 38.5%, the bottom 50% had 4%. In 1976, these figures had improved to 34.6% and 7.7% but the trend has reverted to normal, creating increasing inequality.

Reserve Bank, interest rates and consumer spending

Until about one month ago, the only real tool used by the Reserve Bank to control the inflation rate has been to adjust interest rates and it will probably remain the most significant tool in the future. Little analysis of this takes place, other than to discuss whether or not it works to change the inflation rate. The effect that it has on actual workers is not critiqued. We are told that raising interest rates benefits all of us because the evil of inflation is held in check. What an increase in interest rates does of course is put pressure on mortgage interest rates and rents. Effectively therefore, this takes money out of the pockets of the people with the least assets and transfers it to those who own the most assets. Ironically, at times when interest rates are falling, the argument is made that wage restraint is important because just when workers are getting more money in their pockets, wage increases might fuel a return to inflation. The reality is that as long as power resides with the owners of capital, any change in the state of the economy will be manipulated to benefit them at the expense of workers.

In fact, the trend internationally, and New Zealand has been at the forefront of this since 1984, is for government to absolve itself of responsibility for huge issues in the economy. This laissez faire approach is justified in terms of freedom (of the market) and market self-regulation. This harks back to the thinking of Adam Smith and the “invisible hand”. Of course the market is never really “free” – it’s a market after all, not a living thing, and the last thing business really wants is a truly “free” market, business wants a market it controls. So free or regulated markets are simply tactical decisions capitalists make in order to respond to the situation they find themselves in. When the 4th Labour Government floated the currency, it was responding to the eventual failure of Keynesian regulatory tools. But it wasn’t really “freeing” the market. It was handing over control of it to a different set of interests, primarily the financial and investment sector. When Alan Bollard took the (by today’s standards) unusual step of intervening directly in the currency by selling New Zealand dollars, there was immediate talk of the possibility of big fund managers “taking him on”. And take him on they could. Back in the eighties they were strong enough to do exactly that to the French franc and the French economy was and is vastly stronger than New Zealand’s. Certainly, this is an international issue. Even a huge economy like China’s is not immune. In June of this year, China was threatened with court action for non-tariff protection of its economy for not allowing the RMB (Yuan) to float “at its true value”. But if ordinary workers are to have real control over their lives, regaining real control of the economy and the currency will be one of the battles that must be fought.

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