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© The Treasury Trends in income inequality and other socio-economic outcomes Ben Gleisner Senior Analyst – Workforce Attachment and Skills

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© The Treasury Outline 1.Static analysis of income inequality Key concepts – income, equivalence, housing costs, measures Trends for NZ relative to other OECD countries 2.Relationship with other socieconomic outcomes 3.Dynamic analysis – what may determine future equality? Educational outcomes Benefit dependency Wealth inequality 2

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© The Treasury Key concepts Definition of income The level of incomes inequality depend on which income concept is used Including government services – HH ‘final income’ – also important Source: MSD household income report 2010 Income inequality in New Zealand (80:20) 3

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© The Treasury Key concepts Equivalence Taking into account household composition is important Household 2 Household 3 Income $50,000 Income $76,844 Income $70,226 ‘Equivalent’ incomes Household 1 4

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© The Treasury Key concepts Including housing costs Most international comparisons do not factor in housing costs – using ‘before housing costs’ (BHC) However, it is important to consider – lower income households pay a far greater proportion of their income on housing Measures after housing costs (AHC) there show higher inequality Including government services – HH ‘final income’ – also important 5

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© The Treasury Key concepts How to measure income inequality 1. Ratios of top – bottom Incomes at the top of each decile (AHC) Source: MSD household income report 2010 Share of total income in the population 2. Gini Coefficient 6 40 % 10 % 40 %

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© The Treasury Trends in income inequality Source: MSD household income report 2010 7

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© The Treasury Trends in income inequality Source: Aziz, O. & Gibbons, M. (2010). Fiscal incidence study 2010: Stage 1 report. Wellington: Treasury Gini Coefficient (x100) for Household Disposable Income (HDI) vs Final income (HFI) 8

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© The Treasury Trends in income inequality Source: MSD household income report 2010 Change in income inequality in NZ – mid 80s to mid 2000s 9

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© The Treasury Trends in income inequality Source: OECD (2008), Growing Unequal? : Income Distribution and Poverty in OECD Countries 10

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© The Treasury Trends in income inequality Source: MSD household income report 2010 Gini Coefficient (x100) within OECD countries (around 2004) 11

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© The Treasury Conclusions on trends 1.Income inequality in NZ grew sharply between mid 80s and mid 90s, but stabilised recently 2.Including government support, growth is less 3.But still high inequality relative to other OECD countries Including government services – HH ‘final income’ – also important 12

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© The Treasury Trends in other variables Index of: Life expectancy Math & Literacy Infant mortality Homicides Imprisonment Teenage births Trust Obesity Mental illness – incl. drug & alcohol addiction Social mobility 13

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© The Treasury ‘Variable X’ Trends in other variables As income inequality has increased Variable X has reduced Gini Coeff Variable X 14

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© The Treasury Trends in other variables Notes of caution when using results 1.The graphs illustrate the trend in two variables, and the relationship between these trends 2.To make statements about any causal relationship requires more complex analysis 3.Assuming causation, limitations of this approach: a.Lack of data points b.Potential time lags c.Lack of a ‘control’ variable Over time you would expect to see an increase in poor social/health outcomes with increasing inequality 15

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© The Treasury Life expectancy (yrs) Trends in other variables Incomes at the top of each decile As income inequality has increased life expectancy has increased Source: StatsNZ 16

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© The Treasury School qualifications (% adults > secondary) Trends in other variables As income inequality has increased educational attainment has increased Source: MSD Social Report 2010 17

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© The Treasury Infant mortality (deaths/1000 live births) Trends in other variables As income inequality has increased infant mortality has reduced Source: StatsNZ 18

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© The Treasury Homicide (/100,000 people) Trends in other variables As income inequality has increased homicides have fallen Source: StatsNZ 19

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© The Treasury Imprisonment rate (/100,000 people) Trends in other variables As income inequality has increased imprisonment rates have increased Source: Corrections NZ 20

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© The Treasury Teenage births (pregnancies/1000 teenagers ) Trends in other variables As income inequality has increased teenage births have increased Source: StatsNZ 21

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© The Treasury Obesity (% in population BMI > 30) Trends in other variables As income inequality has increased obesity has increased Source: MoH 22

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© The Treasury Conclusions on association 1.In some cases, strong positive relationship between income inequality and specific ‘bad’ socio-economic outcomes 2.In other cases strong negative relationship 3.Not as universal as Wilkinson’s thesis may have predicted 4.Other issues to consider e.g. potential time lags, no control variable 5.Useful to have some international comparisons 6.Finally, causation is difficult to prove Important to think about dynamic effects. Number of possible variables will determine future inequality. 23

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© The Treasury Education outcomes Source: PISA 2006 24

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© The Treasury Benefit dependency Source: WWG report 27

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© The Treasury Household wealth Source: Statistics NZ (2001) - Net Worth in New Zealand 25

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© The Treasury Household income 26 Source: MSD household income report 2010

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© The Treasury Concluding comments 1.NZ experienced a large growth in income inequality between mid 80s and mid 90s, but stabilised since (up to 2009) 2. Movements in inequality appear to be associated with a number of positive and negative outcomes 3.Causation difficult to prove – further worked required on where there are negative relationships. International comparisons useful. 4.Persistent income deprivation may be more of a concern than income inequality – i.e. focus on dynamic inequality 27

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© The Treasury Trends in income inequality and other socio-economic outcomes Ben Gleisner Senior Analyst – Workforce Attachment and Skills

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© The Treasury Income deciles

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© The Treasury Equivalence

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© The Treasury Change in real incomes

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© The Treasury Benefit dependency

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© The Treasury Income

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© The Treasury Wealth inequality Source – Motu (2010) Household Wealth and Saving in New Zealand

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© The Treasury Wealth vs income inequality Source – Motu (2010) Household Wealth and Saving in New Zealand

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© The Treasury Tax changes Source – Treasury – online (Aide Memoire)

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