Income inequality in New Zealand: Why conventional estimates are misleading

Abstract

Considerable attention is now paid to establishing the extent of inequality in New Zealand and whether it has risen in recent years. This paper offers some insights into the inequality measures and interpretations that commonly feature in those debates. These typically relate annual Gini coefficients for various income definitions, or comparisons of income growth rates across income deciles. But cross sectional data fail to take into account the longitudinal dimension of inequality, and this can lead to misinterpretations of inequality data. The paper shows that examining longitudinal income data for the same individuals over time strongly contradicts some apparent messages of cross-sectional evidence. For example, some recent cross-sectional inequality measures suggest that the incomes of initially low-income households grew at slower rates than those with initially higher incomes. This has been interpreted as the poorest earners being ‘left behind’. But recent longitudinal data, at least for individuals, reveals evidence of much faster-than-average growth among initially lower, compared to higher, income earners. Thus, ‘regression to the mean’ is a dominant feature of the longitudinal data. Show more