Inequality crisis?

By Eric Crampton 29/06/2015

Consumption inequality in New Zealand is down. Not just down on the mid-1990s post-reform peak, but also down relative to 1984.

That’s the conclusion out of new work by Ball and Creedy at the Treasury. I cover it over at The Initiative’s Sandpit blog. But here’s the key figure.

Gini Inequality and Tax Changes 1984 to 2013

The dashed “Market” line traces Gini inequality in market earnings over the period – that’s before taxes and transfers. That series rose from the late 1980s through about 1994, then levelled off before easing back to early 1990s levels.

The solid “Disposable” line tracks Gini inequality in disposable incomes – that’s after tax and transfer. This measure rose from 1988 through to about 1994 then was basically flat. Note that the spike at 2001, and again around 2010, coincide with tax changes that encouraged income shifting from one year to another, generating the hump.

The dashed “Consumption” line is the one that’s particularly interesting. It measures inequality in real consumption. That measure rose a bit from the late 80s, plateaued through the mid-90s, and has eased off since then. Current inequality in consumption is lower than it was before the 80s reforms.

I doubt that data will have much effect on media frenzies around inequality. But at least you and I know better.

0 Responses to “Inequality crisis?”

  • Can you explain for me in “dumb street guy” terms what this means Eric? I get the upper line, but what is the takeaway from a 20+% increase in disposable income inequality cf essentially flat consumption inequality?

    • Consumption inequality can decline by more than disposable income inequality if there’s higher variance in disposable income inequality. In that case, positive shocks to income are met by savings and negative shocks are met by debt.

      It can also be the case that income that’s from unreported sources nevertheless turns up in consumption figures. So imagine somebody who’s partially attached to the formal sector and partially in the informal sector. When formal sector earnings are fine, they’re reported. When earnings come from an untaxed informal sector, they may underrepresent income when asked in the Household Economic Survey while still reporting expenditures accurately.

      Those are potential explanations anyway – you’d have to talk to the stats folks and the authors to get their takes on it.

  • Would like to see an report on the social effects of unaffordable house prices on the next generation. A whole generation is being denied home ownership, I expect the social cost to be huge.

    • Renting isn’t *that* bad compared to owning. Some sources suggest renting can be better: it’s more flexible, so if jobs move its easier for a tenant to decamp to better pastures than it is for an owner.

      But there’s huge harm being done to poorer cohorts through the overcrowding that comes with high rental costs.

  • “It can also be the case that income that’s from unreported sources nevertheless turns up in consumption figures”

    So, building trades *cough cough*

  • I wonder how much of the difference between the levels of disposable income inequality and consumption inequality come from highly volatile earnings in agriculture. And then how much of the narrowing of the gap between the two measures is due to either more stability in agriculture earnings or a greater use of hedging.

  • So a whole generation works their lives to own nothing, working for nothing is slavery isn’t it ? “Some sources suggest renting can be better” , yes that would be land owners talking, the people with the most money have the loudest voice.

  • OMG I read that report it is quite ridiculous in its inference, well I suppose it depends whether we are talking about immigrants or naturally born New Zealanders. I have no problem with immigrants renting but overseas landlords renting to New Zealanders, should be criminal.