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Matt Nolan says the decline of middle class household incomes is an American issue, not a New Zealand one; ours have risen even in difficult times. We should worry about other income issues he says. Your view?
By Matthew Nolan*
Although the economic troubles of the last five years have been tough for the majority of New Zealanders, in the United States the middle class has had an exceptionally difficult time.
In fact, even prior to the crisis, the US middle class had stagnated with the benefits of growth seemingly only heading to the wealthy.
This squeezing of the US middle class raises an important question – is the same thing happening in New Zealand?
The short answer is no, but let’s dig into the figures in any case.
On November 29, the New Zealand Household Economic Survey (HES) was released by Statistics NZ. The data from this survey is used by both Treasury and the Ministry of Social Development to create annual indicators of changes in inequality and poverty.
Given that Statistics NZ only had limited funds to allocate to this survey, the sample size is relatively small, and as a result the numbers can jump around a lot. However, with no up-to-date census data this is the best indicator we have of the distribution of income in New Zealand.
In order to interpret these figures we have to be very careful. In the June 2011 year there was a sharp drop in median income, and a corresponding lift in inequality. And then in the June 2012 year there was a sharp lift in median incomes – and it is likely that MSD will report that inequality fell.
In truth, there is unlikely to have been such a significant change in inequality, or incomes, during those two years.
Furthermore, the raw data from the HES provides income data gross of tax, and the “median” household at a point in time is likely to be different.
As a result, we can only interpret these figures in very broad terms. However, with those caveats in mind, we can still use the figures provided by the HES to give us a flavour of what has been happening.
In the past five years (between June 2007 and June 2012) real median household income rose 4.6%, or by 0.9%pa. On the face of it this performance is a relatively weak one, but it did occur in the face of a drastic slowdown in the New Zealand economy.
To put it in perspective, real gross national disposable income per person increased by only 2.1% during the same period, and average household income rose 4.9%.
Over a longer period, the performance of New Zealand’s “median” person has been even better.
Between the March 1998 year and the June 2012 year, real median household income rose 27% (an average of 1.7% per year).
So the middle/median household can effectively afford 27% more goods and services now than they could in March 1998.
And even in relative terms, the middle/median household hasn’t done too badly. Per capita real gross national disposable income rose 26% during the same period, showing that the middle classes have experienced income growth roughly in line with growth in incomes over the economy as a whole.
To make the comparison more precise, median real household income has increased 27% while average household income has risen 23% over the last 14 years.
The median and the average grow at different rates depending on how the “distribution” of income changes. If the pre-tax income of high income earners was rising more slowly than other people, then median growth would be higher than average growth, as we have seen here.
So not only has the middle class become wealthier over the past 14 years, but it appears that their relative status has also improved.
How does this compare to what has happened in the United States? In the US, an organisation called Sentier Research provides information on real household median incomes.
Their index suggests that, between January 2000 and now, real median incomes in the US have fallen around 8%. While the middle class have been becoming progressively better off in New Zealand, their US counterparts have been experiencing a general decline in incomes.
In relative terms, the decline of the middle class in the US is even starker – with per capita GDP estimated to have increased by 8.5% between March 2000 and March 2012.
In the US the average man has seen things get worse, even as technology and innovation have increased the size of the US economy.
Understandably this widening gap can be seen as very unfair, and as a result it is a justifiable issue for policy in the US.
However, a cursory look at the data suggests the same is not the case in New Zealand.
The data does not say that hardship hasn’t increased for some groups, or that there are people in New Zealand who are unfairly burdened with a lack of opportunity. However, it tells us that we cannot use the same arguments that are being thrown around in the US to justify any government intervention here.
Instead of rallying about the hardships of the “middle classes” we should be asking who is actually struggling in New Zealand.
Who, as a society, are we letting down?
In truth, the middle class complaining in New Zealand is really just a bunch of people feeling sorry for themselves simply because life is hard – when the real focus should be on those unable to find work, struggling to adapt to needing new skills in a changing economy, or those trapped in a cycle of real poverty.