Understand Inequality

What is inequality?

There are many kinds of inequality – of gender, ethnicity, sexuality, and so on. This site focusses on inequality of income and wealth, sometimes known as economic inequality or resource inequality because income and wealth are both things (resources) that the economy produces.

Income is the money that comes in week to week or month to month, while wealth is people’s stored up assets, like houses, KiwiSaver investments, or cash in the bank. Income is what people need to get through the present, while wealth allows them to plan for the future and make investments.

Income and wealth inequality is about who gets what – the fact that some people have much more or much less of these things than others.

Why this kind of inequality?

Income and wealth aren’t the only things that matter for a good life and people’s ability to pursue their dreams and participate in society. But they do make a big difference to the kinds of lives people can lead. And the size of a society’s income and wealth imbalances can drastically change the nature of that society, and how healthy and connected it is. So it matters how income and wealth are shared out.

How unequal is New Zealand?

In New Zealand, income (and probably wealth) was being shared out more and more evenly from the 1950s up until the 1980s – but for the next two decades we had the developed world’s biggest increase in income inequality.Wealth and New Zealand - Great Divergence

As the graph (at left) shows, in that time, the average income of someone in the richest 1% has doubled, from just under $200,000 to nearly $400,000 (adjusting for inflation). In contrast, the average disposable income for someone in the poorest 10% is only slightly higher than it was in the 1980s. (More details and the source of this graph can be found in Wealth and New Zealand, published by BWB.) That means many New Zealanders struggle to pay their bills and lead a decent life.

Another way to put it is that someone in the richest 10% used to earn five times as much as someone in the poorest 10%; now they earn eight times as much.

Wealth is also very largely in the hands of a few. As the graph (below) shows, in New Zealand the wealthiest tenth own nearly a fifth of the country’s net worth, while the poorest half of the country has less than 5 per cent. That leaves many people in poverty, lacking the resources they need to participate in society and follow their dreams. (Again, further details are available in Wealth and New Zealand.)

Wealth and New Zealand - Wealth-Gap TowerWhat is the connection with poverty?

Inequality connects both ends of the spectrum, wealth and poverty, and argues that they have to be looked at together. The fundamental issue is distribution: how are the economy and society structured, and where do they deliver their rewards?

In other words, poverty doesn’t exist in isolation: people are poor, in part, because the economy directs much of the country’s resources to those who are already doing well. For instance, within a company, pay for ordinary staff can be low because so much of the company’s income goes to senior management and shareholders. Wealth and poverty can’t be separated.

Are people worried about inequality?

Polling shows New Zealanders have consistently rated inequality as the single biggest issue facing the country since 2014. Over 80 per cent of the country say they are concerned or very concerned about income and wealth imbalances. Internationally, all the world’s major economic bodies – including the IMF, the OECD and the World Bank – have argued for some time that inequality is a major problem and must be addressed.

What are the impacts of inequality?

For some people, inequality is fundamentally unfair: if people get such very different rewards for their work, there must be something wrong. There are also practical reasons to be concerned about inequality.

Unequal societies are less functional, less cohesive and less healthy than their more equal counterparts. The damage inequality does falls under five headings: trust and cohesion; health; opportunities; open politics; and the economy.

When it comes to trust and cohesion, in an unequal society, people lose touch with how ‘the other half’ lives.  Growing income imbalances breed distrust and eat away at the bonds between people, weakening our sense of each other’s lives and our ability to pull together to tackle difficult problems.

On the health front, more unequal societies are more materially competitive, more hierarchical and more stressful. This leads to higher rates of stress-related illness.

Opportunities are damaged as well: inequality means that people’s chances are limited by who their parents were. In a society like America, you can predict half of a person’s income from what their parents earned, because huge inequality leads to such different starts for rich and poor kids and the government doesn’t offer much support for adults. Advantage and disadvantage are passed on from generation to generation.

In contrast, in more equal societies like Denmark, all parents have enough income to buy their kids a computer for school and heat their home properly, and strong public services help out those struggling in later life. People can make their own way in life rather than being heavily influenced by their parents’ status. New Zealand is currently somewhere in between these two extremes, but probably becoming more like America.

When it comes to politics, inequality allows wealthy people to influence politicians, who rely on them for donations to fund their campaigns. That means some people get more access than others – a violation of the ideals of democracy.

Finally, when it comes to the economy, recent OECD and IMF research shows that more unequal countries have worse economies, because poverty deprives them of the full talents of some children and the economy becomes prone to asset bubbles and instability.

In these five areas, the failings affect all of us, no matter where we are on the spectrum.

What causes inequality?

Inequality has many causes, and they vary from country to country. Global trade agreements play a role, by shifting manufacturing and other jobs to countries with lower pay. But many of the causes are purely domestic. In New Zealand, in the 1980s and 1990s, taxes were cut for top earners, while benefits were reduced by up to 30 per cent for the poorest families.

Thousands of people lost their jobs as companies moved overseas, and the number of people in trade unions – which traditionally pushed up the wages of ordinary workers – fell from 70 per cent of the workforce to 20 per cent.

In addition, some inequality is down to things like household types (we have more single parent families than before, and they tend to be poorer), though these factors are probably not as important as those above.

When it comes to wealth, the sale of public assets will have increased the wealth of those at the upper end, while declining home ownership means fewer and fewer people have that most important kind of asset. Data shows that most saving – a key way to build up wealth – is very difficult except for those who have large incomes or work in the property sector.

How are the terms defined?

Income inequality is usually calculated based on after-tax income (since that’s what people can actually spend) and on a household basis (since people spend money as part of a larger family unit, in most cases).

The sections above described how incomes in New Zealand have diverged in the last few decades. Another key way to look at income inequality is the Gini coefficient, which in essence takes all the income gaps in a country – all the gaps between how income is distributed and how it would be distributed in a perfectly even society – and adds them together. As the graph (below) shows, New Zealand’s Gini coefficient rose rapidly in the 1980s and 1990s.Gini coefficient 2015

It fell a little in the 2000s, thanks to Working for Families and a higher minimum wage, but since the global financial crisis it has started rising again.

For wealth inequality, the measure is individual (or sometimes household) net worth, which is someone’s assets (what they own) minus their liabilities (their debts, or what they owe).

More information

Detailed answers to specific questions can be found on the right-hand side menu on this page.

To read the full account of inequality in New Zealand, and to find the sources for the above claims, you can buy (online or in a bookstore) one of the Bridget Williams Books ‘Inequality’ series. Details here.

You can also see where you sit on New Zealand’s income spectrum using the Inequality Calculator. Find out how much you earn compared to your fellow citizens here.