5  Decomposition Analyses of Changes

In this section we consider more formally the issue of decomposing changes in alternative summary measures of individual and household income distributions between 1998 and 2004.  We focus on the contributions of direct labour market effects (i.e. the increase in employment, together with changes in hours worked and wages) and changes in related demographic factors over the period.  In particular, we first present simple analyses of the contributions of earnings, employment, hours and wage changes across the distribution of individuals’ income; and then we present analyses that decompose the relative change in income at various points of the distribution into components attributable to observable demographic, employment, and household structure change, components attributable to changes in the economic “returns” to these factors, and components attributable to unobserved factors.

5.1  Changes across the Income Distribution

We begin by describing income changes broadly across the income distribution, and then consider the contributions of, first, changes in employment earnings, and then employment, hours worked and wages to these changes.  For this exercise, we focus on working age individuals, and stratify the sample according to each individual’s rank in the total income distribution in 1998 and 2004.  More specifically, each individual was assigned to one of 102 “strata” corresponding to negative income, zero income, and the 100 percentiles of the distribution of positive income for each year.  Our analyses then consider within-strata income, earnings, employment, and conditional hours worked and hourly wage, averages and changes in these averages between 1998 and 2004.

First, Figure 4a shows the average income across the percentile-strata in each of 1998 and 2004, together with the fraction of income from earnings in each year.[25]  The fraction of income from earnings has a U-shape across the distribution in both years.  In 1998, the fraction drops sharply from around 90 percent in the lowest percentile to below 20 percent at the 18^th percentile, and then rises to about 60 percent at the 30^th percentile, 80 percent at the 45^th percentile, and (almost) 100 percent by the 75^th percentile.  A similar pattern is observed in 2004, although the earnings fraction does not fall below 40 percent, and is consistently higher across the distribution than in 1998.  The much lower earnings fraction in 1998 between the 15^th and 20^th percentiles is largely associated with NZ Superannuation income available to 63 and 64 year-olds in that year (see the appendix Figure A3). 

In Figure 4b we next describe the percentage increase in income at each percentile of the distribution between 1998 and 2004, and also the increase in earnings relative to 1998 income levels.  The solid line shows particularly strong relative income gains on the order of 20 percent around the 3^rd decile (i.e. between the 20^th-30^th percentiles) of the distribution, and lower gains elsewhere.[26]  The earnings increases (relative to income), represented by the dashed line, show large increases in the low-mid range of the income distribution.  Thus, Figure 4a and Figure 4b show both that incomes increased across all percentiles in the distribution (broadly consistent with results shown earlier), and emphasise the strong contribution of employment earnings to the increases between the 10^th and 70^th percentile of the distribution over the period.

We next pick up on the latter point by showing, in Figure 5, the changes in the factors that contribute to earnings (i.e. being employed, hours worked and hourly wages).  First Figure 5a shows the average employment rate, and hours worked and hourly wage (both conditional on being employed) in 1998 for individuals in each percentile-group of the income distribution.  This figure shows a steady increase in each of these measures from low to higher percentiles of the distribution.  The employment rate and hours worked gradients are steeper at low-mid range percentiles, while the wage gradient is steeper towards the top end of the distribution.  Note that, the employment rate does not distinguish between full-time and part-time, so that an increase in average hours worked may reflect either a greater fraction of full-time versus part-time workers (at ‘standard’ hours) or an increase in hours worked conditional on full- or part-time employment status.

Second, Figure 5b describes the changes between 1998 and 2004 in each of these factors across the distribution.  This graph shows that individual employment increases were concentrated between the 10^th and 55^th percentiles of the distribution (largely because there is essentially full-employment by this point).  The relative changes in hours and wages are less clear.  However, broadly speaking, there appear to have been some positive relative increases in hours worked in the low-mid range (10^th-60^th percentiles) of the distribution; and, although relative wage increases are observed over most of the distribution, they appear to be somewhat stronger in the top half of the distribution.

We have repeated this set of analyses based on working-age individuals’ equivalised household incomes.  The fractions associated with each of the income components are based on the respective equivalised household income from that source.  For this analysis, the employment rate whether the household had any employment earnings; average hours worked are calculated, for households with employment, as the average across all working-age individuals in the household (including zeros for those not working); and average wages are based on the average wage across all working-age individuals who were working in the household. 

The results based on equivalised incomes are presented in the : Figure A4, Figure A5, and Figure A6, and are broadly in line with those described here for individual-level outcomes.  Due to the recognition of income sharing within households that underlies the equivalisation, differences in the relative equivalised income and earnings changes are less pronounced across the distribution.  The same basic conclusion that employment increases were confined to the lower half of the distribution remains (again, arguably because, based on the definition of employment adopted, there is full employment above the median of the distribution).  However, hours of work (conditional on household employment), which is perhaps a more useful measure of “employment” in this context, have been increasing across most of the equivalised income distribution, while relative wage changes are also somewhat more broadly spread than across the individual income distribution.