Wednesday 29 January 2014

Income Inequality - Better or Worse?

Last week, I had a look at John Key's claim that "income inequality has been declining" and found it to be, well, technically true over a very small timeframe. Since then, the Opposition parties have been trying to hammer National on this point, and oddly being more specific. Today, they used both the Finance and Expenditure Select Committee (David Parker, Winston Peters) and Question Time (David Cunliffe, David Parker, Jacinda Ardern) to make the claim that:

"Income inequality has worsened under the National-led Government"

(or approximate variants thereof). Let's look at the veracity of this claim using data from a number of sources. Firstly, the "National-led Government" should be defined as 2009-2012 for the purposes of comparing data between these two points. This is due to the fact that for the most part, there is no public data available for 2013 yet.

Statistics New Zealand and the Ministry for Social Development use the P80/20 ratio, comparing the difference between the 80th and 20th percentile of household incomes, where a high ratio would indicate more inequality. This is calculated both before and after housing costs (BHC and AHC). This is an internationally recognised measure, but it is difficult to draw conclusions in the short-term. Looking at the data over our set time period, the BHC ratio decreased from 2.52 to 2.49 and the AHC ratio increased from 2.79 to 2.83. 

Another common measure is the Gini Coefficient, which is a measure of statistical dispersion of income data. A high coefficient indicates more inequality (a coefficient of 0 represents perfect equality). This is reported by the MSD, and shows that there has been a reasonable amount of volatility in recent years. However, overall the coefficient (using the OECD standard) has decreased from 0.331 to 0.317.

The MSD says in the Household Incomes Report that "Income inequality has been very volatile in recent years with the GFC shock impacting on investment returns, employment and wages over the three years from mid 2008 ... The trend-line is flat. There is no evidence of any general rise or fall in income inequality since 2007." 

The Treasury has a report on income inequality based on the Gini Coefficient as well. It predicts that for final income, the coefficient decreases modestly from 0.313 in 2010 to 0.307 in 2060. It also reports that household market income inequality increases 6% and disposable income inequality increases by 1.2%, but somehow this averages out to a decrease of about 2% in final income inequality.

While researching income inequality, I also came across a number of international data sources, including the Standardized World Income Inequality Database, the United Nations Department of Economic and Social Affairs, the Global Peace Index, The Economist's Quality-of-Life Index, and of course that trusty source of information, the CIA World Factbook. Unfortunately none of these sources had data for the time period that we are interested in, but may be of interest to someone else looking for similar data.

Verdict: The claim is false.

Is the relative stability in income inequality something for the National Government to be proud of? This is a very different question. While income inequality has not "worsened" over the 2009-2012 period, it has not significantly improved either. New Zealand remains one of the most unequal countries in the developed world, with a rank of 25 out of 33 countries ranked by the OECD. Interestingly, they also found that income inequality is increasing in most OECD nations based on long-term trends between 1980 to the last 2000s. 

We certainly don't live in an egalitarian utopia, but it doesn't look like we will be moving towards that anytime soon, regardless of who is in power. Inequality is more strongly affected by large-scale macroeconomic events like the Global Financial Crisis and the Canterbury Earthquakes than by (realistic) mild Government policies (an extreme action like giving everyone free money until they're all equal might solve income inequality, but would probably cause something else to go wrong).

Verdict (again): Income Inequality is stable in the long-run. It has not significantly improved or worsened in the long-term, and that is unlikely to change. The National-led Government can't claim a victory here. The Labour-led Opposition can't claim a victory here either. Everyone loses.

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