# Wealth distribution in New Zealand – 2018

The Department of Statistics recently published wealth distribution figures for New Zealand. According to Stats NZ, the median household net worth in the year ended 30 June 2018 was \$340,000, up from \$289,000 in 2015. The increase was mainly driven by an increase in property values over the last three years.

% of net wealth held by % of Households – 2018

According to the survey, the top ten percent of households hold 53 percent of total wealth in New Zealand, which is unchanged from 2015. The top one percent of households hold 16 percent of total wealth in New Zealand, which is down slightly from 2015. New Zealand’s Gini Coefficient is approximately 0.33.

The Lorenz Curve
The Gini Coefficient is derived from the same information used to create a Lorenz Curve. The co-efficient indicates the gap between two percentages: the percentage of population, and the percentage of income received by each percentage of the population. In order to calculate this you divide the area between the Lorenz Curve and the 45° line by the total area below the 45° line eg. Area between the Lorenz Curve and the 45° line  ÷  Total area below the 45° line.

The resulting number ranges between:
0 = perfect equality where say, 1% of the population = 1% of income, and
1 = maximum inequality where all the income of the economy is acquired by a single recipient.
* The straight line (45° line) shows absolute equality of income. That is, 10% of the households earn 10% of income, 50% of households earn 50% of income.

In 2010 China’s Gini coefficient was 0.61 which was one of the world’s most unequal countries however officially it has been falling for seven years from 0.49 in 2008 to 0.46 in 2015. Rural incomes have grown more quickly that their urban counterparts – in 2009 the average urban income was 3.3 times that of a rural worker but now it is 2.7 times. Many of those living in rural areas actually work in cities but are prevented from living there because of the strict residency system. Also companies have now been looking to the rural areas for cheap labour.
But at the top end you would get the impression that inequality of wealth is extremely high – wealth = what you own, as opposed to what you earn. China has more dollar billionaires (596) than the USA (537). Research has shown that 1% of the population control a 1/3 of China’s assets.

# Rural China making a more equal society

The presence of technology in rural China is evidence that it is not just the booming cities that are the sources of growth. Furthermore, it suggests that inequality which has been symbolised by the ‘country versus city’ divide is now starting to decline.

Since the 1980’s China has gone through massive growth but it hasn’t been evenly shared. Income inequality is traditionally measured by using the Gini coefficient.

The Gini Coefficient is derived from the same information used to create a Lorenz Curve. The co-efficient indicates the gap between two percentages: the percentage of population, and the percentage of income received by each percentage of the population. In order to calculate this you divide the area between the Lorenz Curve and the 45° line by the total area below the 45° line eg.
Area between the Lorenz Curve and the 45° line  ÷  Total area below the 45° line

The resulting number ranges between:

0 = perfect equality where say, 1% of the population = 1% of income, and

1 = maximum inequality where all the income of the economy is acquired by a single recipient.

* The straight line (45° line) shows absolute equality of income. That is, 10% of the households earn 10% of income, 50% of households earn 50% of income.

In 2010 China’s Gini coefficient was 0.61 which was one of the world’s most unequal countries however officially it has been falling for seven years from 0.49 in 2008 to 0.46 in 2015. Rural incomes have grown more quickly that their urban counterparts – in 2009 the average urban income was 3.3 times that of a rural worker but now it is 2.7 times. Many of those living in rural areas actually work in cities but are prevented from living there because of the strict residency system. Also companies have now been looking to the rural areas for cheap labour.

But at the top end you would get the impression that inequality of wealth is extremely high – wealth = what you own, as opposed to what you earn. China has more dollar billionaires (596) than the USA (537). Research has shown that 1% of the population control a 1/3 of China’s assets.

# A Level Revision: Comparing living standards over time and between countries

National income figures, usually GDP at factor cost, are the man figures used to compare living standards. This is because most countries keep and publish detailed national income data.

However, care has to be taken in using national income figures to compare living standards both over time and between countries. It is important to use GDP at constant prices (i.e. real national income) so that a misleading impression is not given because of the effects of inflation. It is also important to take into account differences in population size. A country with a large population is likely to produce more than a country with a small population. However, this output has to be shared out among more people so living standards are not necessarily higher. This is why economist divide output by population and compare real GDP per capita. Even when adjustments have been made for inflation and differences in population size, national income figures as a measure of living standards have to be interpreted cautiously.

A rise in real GDP per capital may have resulted from an increase in the output of capital goods. In the longer run this will increase productive capacity and result in more consumer goods being produced. However, in the short run people may not feel any benefit from more capital goods being made. An increase in weapons will also increase GDP but, again, may not necessarily improve living standards. If more police are employed and crime is reduced, the quality of people’s lives will be improved. However, if more police are employed to keep pace with rising crime, people will be feeling worse off. So economists have to look not only at the amount of goods and services produced but also at the composition of those goods and why the quantity has changed. In addition, the quality of goods and services produced should be examined. The same quantity could be produced this year as last year or five years ago but if the quality of the output has risen, living standards will have improved.

The distribution of income also has to be taken into account. National income may rise but if it is concentrated in the hands of a few, the living standards of the majority may not rise. See graph below from The Economist showing the Gini coefficient of income inequality.

National income figures also fail to take into account some items which affect the quality of people’s lives. A certain amount of economic activity is not declared, either to avoid paying taxes or because it is illegal. If there is an increase in, say, people providing home hairdressing services but not declaring them, people’s living standards may rise, although this increase will not be reflected in the official figures.

Differences in working hours and working conditions are also not taken into account. If output remains constant but working hours fall, people are likely to have a higher quality of life.

National income figures only take into account economic activities for which a payment is made. They do not take into account externalities and non-marketed activities. So, for example, an increase in pollution will reduce living standards while an increase in people decorating the homes of old people, on a voluntary basis, will improve the quality of life of the elderly. Neither of these will be recorded in national income figures.

All of these factors have to be taken into account in using national income figures to make comparisons both over time and between countries. However, some additional factors have to be considered when making international comparisons. Different statistical methods are employed in some countries and the degree of accuracy can vary. Tastes and needs can be different in different countries. For example, people living in a cold climate have to spend more on heating than those in warm countries, merely to enjoy the same standard of living. There is also the problem of selecting a rate of exchange to make the comparison. Exchange rate fluctuate and do not always reflect relative prices in compared using purchasing power parities which compare the cost of a given basket of goods in different countries.

# Does inequality impact growth levels?

Interesting report from the OECD that was published yesterday. There are a couple of good graphs that can be used for teaching inequality: The increase in inequality from 1985 – 2011; and the impact that inequality has on growth.

The Gini coefficient increased in 16 out of the 21 OECD countries for which long time series are available, rising by more than 5 points in Finland, Israel, New Zealand, Sweden and the United States and falling slightly only in Greece and Turkey (Figure 1).

The OECD estimate that increasing inequality by 3 Gini points (that is 0.03) points would drag down economic growth by 0.35 percentage point per year for 25 years: a cumulated loss in GDP at the end of the period of 8.5 per cent. Figure 2 below shows the that the increasing levels of inequality are estimated to have reduced growth levels in the majority of countries. Those of note are:

New Zealand -15%
Mexico -12%
UK -9%
Finland -9%
Norway -9%
Sweden -8%
Italy -7%
USA -6%

The graph also shows that greater equality prior to the crisis helped increase GDP per capita in Spain, France and Ireland.

Key Findings from OECD Report

* The gap between rich and poor is now at its highest level in 30 years in most OECD countries.
* This long-term trend increase in income inequality has curbed economic growth significantly.
* While the overall increase in income inequality is also driven by the very rich 1% pulling away, what matters most for growth are families with lower incomes slipping behind.
* This negative effect of inequality on growth is determined not just by the poorest income decile but actually by the bottom 40% of income earners.
* This is because inter alia people from disadvantaged social backgrounds underinvest in their education.
* Tackling inequality through tax and transfer policies does not harm growth, provided these policies are well designed and implemented.
* In particular, redistribution efforts should focus on families with children and youth, as this is where key decisions on human capital investment are made and should promote skills development and learning across people’s lives.

You can view the full document at:

OECD – Does income inequality hurt economic growth?

# Trade-Off between Growth and Inequality.

It has long been thought that you need to have some inequality if you are going to encourage growth. However you can go to extremes, as in the case of Margaret Thatcher, who said that inequality is essential to fostering “the spirit of envy” and hailed greed as a “valuable spur to economic activity”. There is some truth in the matter that without the carrot of financial reward risk taking by entrepreneurs would not be as prevalent as would innovation. This all relates to equity efficiency trade-off where you cannot have both at the optimum level – ie you have an opportunity cost. The Free Exchange column in The Economist discussed this issue.

Negatives of Inequality:
* Damages growth as those on low incomes suffer poor health and low productivity
* Reduces public confidence in growth-boosting policies – eg Free Trade
* A response to the problem of inequality has been to make borrowing easier for lower income groups but when the borrowing ends everyone suffers – Sub-Prime crisis.

Duration of Growth
Some researchers have suggested that getting the economy to grow in the first place is much easier than trying to maintain the levels of growth. When growth does slow down after an initial burst it is usually inequality that is the root of the problem.

Inequality and Redistribution
Further research has tried to separate the effects of inequality and redistribution. Governments tax and spend (fiscal policy) to try and reduce the level of inequality. The chart below shows the difference between 2 measures of income – Market Income and Net Income (after taxes and transfer payments). The difference between the two gives a measure of redistribution. Some notable points:

1. USA – does comparatively little redistribution as its Gini is reduced by approximately 10 points.
2. Sweden – cuts the Gini by 23 points
3. Governments in more unequal countries redistribute more
4. Germany are more unequal than the UK with Market Income but has less inequality when redistribution policies are implemented.
5. Economies that redistribute a lot of lower incomes may have shorter growth periods.
6. If the gap between Market and Net Income is 13 points or more further distribution shrinks growth expansion
7. Inequality more associated with low growth – the higher the Gini Coefficient for net income the slower the growth in income per person.

# Pope talks of Global Inequality

Pope Francis challenged business leaders assembled at the World Economic Forum in Davos to put their wealth at the service of humanity instead of leaving most of the world’s population in poverty and insecurity.

The global economy should grow by 3.2% this year, up from 2.4% in 2013, according to the World Bank. Yet for many, in the developed world and emerging markets alike, the recovery from the worst economic crisis since the 1930s has a phantom-like quality. Many people can’t see an improvement in their quality of life, and the gap between rich and poor is growing.

“Since the global financial crisis, it’s been a race to the bottom in jobs, wages and living standards,” said Philip Jennings, general secretary of UNI Global Union. Central banks have pumped trillions of dollars into the world financial system to stabilize their economies, sending stock markets and real estate prices soaring to the benefit of the wealthy.

# Income equality – Richest 20% v Poorest 20%

The Economist magazine produced a very useful graphic showing the percentage share of income held by the richest 20% and the poorest 20%.

Figures from the World Bank show that by this indicator many of the world’s most unequal countries are in Latin America. In Colombia the incomes of the top fifth are nearly 25 times those of the bottom fifth. Most emerging Asian countries are less unequal: the incomes of the richest 20% of Chinese are about eight times those of the poorest 20%. In Thailand, one of Asia’s most unequal countries, the ratio is 15:1. Qatar’s income per person is among the world’s highest. But income is unequally distributed: the richest Qataris receive over 13 times as much as the poorest.