Inequality in New Zealand 1983/84 to 2012/13

ABSTRACT

This paper provides an empirical analysis of annual income and expenditure inequality in New Zealand over a 30-year period from the early 1980s. The extent of redistribution through the tax and benefit system is also explored. Household Economic Survey data are used for each year from 1983/84 to 1997/98 inclusive, 2000/01 and 2003/04, and for each year from 2006/07.Survey calibration methods are used to examine inequality on the assumption that a range of (approximately 50) population characteristics remain constant over the period. Furthermore, decomposition methods are used to examine the separate contributions to changing inequality of population ageing, changes in labour force participation and household structure.

KEYWORDS:

• Income inequality
• calibration weighting
• decomposition

JEL Classification:

• H23
• H24
• I3

Acknowledgements

We are grateful to colleagues for comments during a Treasury seminar, and Polly Vowles, Kristie Carter, Nicolas Hérault and two referees for comments on earlier drafts. Access to data used in this report was provided by Statistics New Zealand under conditions designed to give effect to the security and confidentiality provisions of the Statistics Act 1975. The graphs presented here are the work of the authors and not Statistics New Zealand. The views, opinions, findings and conclusions of this article are strictly those of the authors and do not necessarily reflect the views of the New Zealand Treasury.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. In various tables and diagrams below, linear interpolation is used to provide values for missing years.

2. The main analyses of redistribution, fiscal incidence and inequality have been carried out within government departments. In particular, see Statistics New Zealand (1999) and work within the Ministry of Social Development reported by Perry (2014). The New Zealand Treasury carries out regular fiscal incidence studies. An earlier description within the Department of Labour is Dixon (1996). Summary results for disposable incomes selected years (1981/82, 1985/86 and 1989/90) are reported in Saunders (1994). Decompositions by income source for 1983/84, 1991/92 and 1995/95, using gross (pre-tax) incomes are reported by Podder and Chatterjee (2002), using household income per person as the income measure, with individual as unit of analysis. The selection of years gives a misleading picture of the inequality changes over the 1980s, as seen below.

3. For a description of the integrated weighting used by Statistics New Zealand, see Statistics New Zealand (2001).

4. For example, the unit of analysis could also be the ‘adult equivalent person’ or the household, and a range of Atkinson inequality measures were obtained using different degrees of inequality aversion.

5. However, this can be done for more recent selected years in New Zealand; see for example Creedy and Eedrah (2015). Adam and Browne (2010) looked at the redistributive effect of taxes in the UK over a thirty year period, but this kind of exercise is not possible for NZ in view of the large changes in eligibility rules and their enforcement, the types of benefit in existence, and the information needed to apply the rules.

6. Of course, the recognition that, for particular purposes, a variable is being treated as exogenous is extremely common in both empirical and theoretical economic analyses. In any analysis of redistribution, it must be recognised that the pre-tax distribution is not itself exogenous.

7. For a decomposition analysis allowing for leisure see Creedy and Hérault (2015).

8. Podder and Chatterjee (2002, p. 11) argue that the ‘appropriate weight must be the number of members in the family’. However, the option of using the number of equivalent adults is discussed by Glewwe (1991), Decoster and Ooghe (2003), Shorrocks (2004) and Creedy and Scutella (2004) see also Creedy (2013) and Creedy and Eedrah (2015).

9. Creedy and Sleeman (2005) found that, despite its simplicity, it provided a close fit to 29 alternative sets of equivalence scales.

10. For further discussion of calibration in the New Zealand context see Creedy and Tuckwell (2004).

11. In Section 6 below, sample weights are obtained for each year using the calibration totals for all other years. This is straightforward for aggregates such as the number of people in an age and gender group, but the nature of benefits changes over time. New benefits are introduced, while others are abolished, while the regulations regarding benefit status and eligibility can change in significant ways over time.

12. The distributions of market income per adult equivalent obviously have a number of zero observations. Negative values were excluded, since the Gini is defined only for non-negative incomes. Zero and negative values of disposable incomes were excluded. These deletions involved a very small number of households.

13. For the Gini the equally distributed equivalent, y_E, is a ‘reverse rank weighted’ mean and, since , rearrangement gives, . Hence, can serve as the abbreviated welfare function, giving the same ranking of distributions as the actual welfare function, ∑ⁿ_{i = 1}(n + 1 − i)y_i, and the same trade-off between ‘equity and efficiency’. See also Subramanian (2002), who uses a form of the Gini that is not replication-invariant. The Gini measure shares this abbreviated form with the Atkinson measure, for which the equally distributed equivalent income is a power mean.

14. These types of change are also stressed by Statistics New Zealand (1999).

15. It is therefore desirable to carry out these decompositions in the most efficient manner, since all 720 alternatives need to be evaluated. There are many known algorithms for iterating over permutations, but significant speed improvements can be obtained by using results from previous iterations which start with a subsequence of the current iteration. For instance, knowing the combination (1,2,3,4,5,6) means that it is necessary only to obtain the last two calculations for the combination (1,2,3,4,6,5). Taking this optimisation into account, iteration is over the permutations in lexicographic order: for example, see Knuth (2005).

16. The components for the whole period are not equal to the sums of the separate components for subperiods. This can easily be seen by taking the simple case of subsection 6.1 and writing down the relevant decompositions for two-subperiods, t₁ to t₂ and t₂ to t₃ and the complete period t₁ to t₃. However, the total change in the Gini measure over the whole period 1984 to 2013 must equal the sum of the separate year-to-year changes.