1  Introduction

The dramatic increases in income inequality in New Zealand during the late 1980s and early 1990s have been widely documented.[1] This was a period of both significant economic and social policy reform and stagnant economic growth. The broad economic trends since the early 1990s can be characterised as consisting of two periods of strong economic growth, the first from 1993 until 1997 and the second from 1999 until the present, interrupted by a relatively brief and shallow recession during 1997-98. The body of literature on changes in inequality during the 1990s has generally found relatively modest changes during the first of these growth periods.[2]

The period since 1998 has seen no substantial policy or external shocks, and can be characterised roughly as one of “pure” economic growth. The current research focuses on this period and has two objectives: first, to provide an update of income distributional changes during this period; and second, to understand how the benefits of growth, as measured by income, over the period have been distributed across the population. Our analysis uses data from the Household Labour Force Survey's annual Income Supplement (HLFS-IS) over the period from 1997-2004. We treat working-age individuals (aged 15-64) as the unit of observation, and focus on changes in the distributions of their employment related earnings, their gross pre-tax income, and their “equivalised” total household earnings and income between 1998 and 2004.[3]

We begin by describing trends in real (inflation-adjusted) earnings and income levels, and relative inequality over the period. There were widespread increases in earnings and income across the distribution, and comparatively little change in inequality. For example, mean and median individual earnings increased 15 percent and 23 percent respectively between 1998 and 2004, mean and median individual income each increased 12-13 percent; while mean and median equivalised household earnings for working-age individuals increased 15-16 percent, and mean and median equivalised household income increased 11-13 percent. Individual and equivalised-earnings inequality, as measured by the Gini coefficient, fell about 4 percent over this period, while individual income inequality was unchanged, and equivalised-income inequality rose 2 percent. Simple kernel density descriptions of the distributions of individuals’ earnings and income in 1998 and 2004 show no visibly dramatic changes have occurred across the distributions.

Based on these descriptive findings we next turn our attention to the factors contributing to the observed changes over time in the individual (and equivalised) income distributions. Perhaps unsurprisingly, given the sustained period of growth over the period, employment and real wage growth are major contributors to the changes. First, we rank-order individuals by their individual (or equivalised) income, and describe the relative change in income at each percentile of the distribution between 1998 and 2004. We then describe the contributions of earnings, and then employment, hours and wages, to the relative changes in income across the distribution. This provides a more nuanced description of relative changes across the distribution than provided by the trends in the summary statistics, and shows that there have been particularly strong increases in income, of up to 20 percent, in the low-mid range of the distribution. These gains are largely due to strong increases in employment among individuals with income in this region and, to a lesser degree, increased hours of work and wages. Further up the distribution, the relative increases in income are generally smaller (on the order of 6-9 percent), and are dominated by wage increases, arguably because individuals in this range are at or close to full employment.

Second, we adopt a method developed by Juhn, Murphy and Pierce (1993) to decompose changes in individual and equivalised household incomes into observable socio-demographic and human capital, employment, wage (returns), and unobserved effects at various points of the respective income distributions. The results from this analysis are largely consistent with those described previously. About one-half of the increase in mean individual incomes are attributed to the increase in employment, and 20-25 percent due to demographic and wage changes. The relative contribution of employment to increases in income peaked at 90 percent at the 25^th percentile of the distribution, and was only 10-20 percent at the 75^th and 90^th percentiles. In contrast, we find the contributions of (wage) returns increase steadily across the income, from 10-15 percent at the 10^th and 25^th percentiles to over 60 percent at the 90^th percentile. Although somewhat similar patterns of employment and wage contributions to the changes in equivalised household incomes of working-age individuals across the distribution, both the differences in relative income change and the relative contributions to the change at different points of the distribution appear to be moderated when we take account of access to shared resources within households.

The patterns of increasing earnings and incomes described in the analysis indicate there has been wide spread gains across the distribution. The attribution of the changes to employment and wage effects across the distribution indicate that the gains to individuals at the lower ends of their respective distributions have been primarily driven by employment growth, while the gains in the higher reaches of the distributions are largely the result of wage growth.