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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?

Posted in Opinion
It's wrong to assume this is a New Zealand issue. The latest data shows our household incomes are rising

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.

--------------------------------------------------------

Matt Nolan is a senior economist at Infometrics. You can contact him here »  Matt also discusses economic issues on the blog at TVHE.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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43 Comments

Are these income figures

Are these income figures nominal (before inflation) or real (inflation adjusted)?

"median real household

"median real household income"
So I take that to mean after inflation has been allowed for there has been a real gain.
I wonder how much of that has been tied up in our housing bubble, ie paper wealth that is make believe...just what is "income"
The Q I have to wonder on is who is propping up the numbers....ie someone is getting a pay increase, to make up for those getting none...
regards

What is the definition of

What is the definition of middle class in NZ?

My 'X' customers!

My 'X' customers!

Thats an interesting Q.  I

Thats an interesting Q.  I listened to a program on the US middle class and a self-employed truck driver was classed as middle class.....which surprised me.
I suspect its much mis-used these days and the lines are blurred.
regards

Very little useful analysis

Very little useful analysis here, what would be helpful would be a comparison of incomes to essentials (housing, food and power) and non essentials (Flat Screens and overseas holidays)

'Real' incomes may be up 27% but I reckon Real 'essentials' are up way more.

Hence the fall in luxury item prices offseting in the CPI, so even though in theory real incomes are up, they are used disproportiaonately on essentials, so are we actually better off? 

Regular readers will know

Regular readers will know that we track a standard (healthy) grocery list weekly, and have been doing this for 82 continuous weeks now. If you used this as some sort of proxy for "essentials" the answer is that these groceries are cheaper this year than at the same time last year. And over the whole a six-month period they show a tiny reduction - certainly no rise.
This data kind of backs up Nolan's point. Incomes may be up, but the costs for these core 'essentials' are not. And remember, these grocery costs include GST.
The other interesting point is that we monitor exactly the same items in Australia (Sydney) - and costs in NZ are lower at market exchange rates. Kiwis are getting a better deal, and this is even though GST is lower in Australia. Go figure.

Didn't Nolan already claim

Didn't Nolan already claim the figures were inflation adjusted? We just don't know which deflator series was used to arrive at the stated figure.
 
Between the March 1998 year and the June 2012 year, real median household income rose 27% (an average of 1.7% per year).
 
A quick play with the RBNZ calculator may prove instructive for those wishing to drill down a bit further without undue effort.

Good catch. That would imply

Good catch. That would imply the trade deficit hasn't been completely put to waste in productiveless investments/consumption.

Im glad your are doing this,

Im glad your are doing this, its good to have more than one source.
One thing have you been watching the ingredients? one way to save is to charge the same but use cheaper inside, tomato sauce is a classic......olivani/oliveti another....the olive oil % has been declining and now there is a "vegitable oil" of un-specified %.
Bear in mind that many manufacturers want to put up prices but cannot....they lose sales....which of course flies in the face of property and rental streams for ever going up.....
To an extent I think we need to watch the non-tradables costs as well as food.
Do you monitor Council rates per borough? I have been monitoring my rates via a spreadsheet since 2003....its been averaging 6%+ per annum for Wellington.
Insurance?  Slight actual money increases but the cover amount has been declining hiding the real incraese....so it costs me the same for less.
Electricity?
Commuting transport? 
Doctors fees?
Dentists?
Petrol?
These are of course the costs that poor to middle class see the impacts of.
Against that we see the disposable/descretionary costs,
electronic toys (computers, phones etc)
tools
clothes
shoes
eating out
Something the better off see discounts on.
From my watching I think most of the former are up, the latter seem to be having to drop to compensate....so overall, roughly flat for the year for me.
regards
 
 

steven, why do you think the

steven,
why do you think the food industry lobbies all over the world are so vehemently against any stricter food labeling regulations? It is primarily to avoid being found out what really goes into our food. Not because labeling more detailed and clearly would be "impossible" or "very expensive" to achieve...

Of course it is....palm oil

Of course it is....palm oil comes under vegitable oil....personally unless it says what oil I assume palm and I dont buy it.
regards

Funny you say that. I emailed

Funny you say that. I emailed a major peanut butter maker a couple years ago and asked what oil they substituted. Basically told me it was not my business to know.
Cheers

Is that for environmental or

Is that for environmental or health reasons?

I know I and others have said

I know I and others have said this before, but I think its flawed to convert Aus grocery prices to NZ dollars, then conclude that kiwis are getting a better deal by virtue of the converted price being higher than the price in NZ. What counts is how much the groceries are costing relative to your local income.  
If you do this comparison on the basis of market exchange rates, then you have to account for the fact that in relative terms Australian salaries are also much higher when the NZ dollar is weak versus the Aus dollar, as it is at present. So under those conditions goods in Aus will seem higher relative to goods in NZ, but incomes will also be much higher
 
 
 

And I would be interested to

And I would be interested to know if interest.co.nz has got around to including the aldi prices yet....
 
Coz it might be all too interesting when that is done...

Agree, it is relativity of

Agree, it is relativity of local expenditure to local income that matters.

David,   In your food price

David,
 
In your food price surveys,do you check prices based on cost per unit or cost per item? In other words, do you account for reduced contents at the same (or slightly increased) price?
 
The reason i ask this very specific question is that since we started to look more carefully at the actual per unit cost in food items over the last couple of years, I was often surprised at some rather stealthy creeping cost increases while the actual item cost stayed the same. Also, we seem to buy a few imported items, like european foodstuffs, and those have stayed the same. But I suspect that the appreciating kiwi $ has a lot to do with that. What would happen if the dollar drpped (or other currencies stopped their  steep fall)???

We use cost-per-item as the

We use cost-per-item as the base test. However, having said that, each item has a size/weight/count standard and we check to see if that changes. When it does, we subsitute for another similar item of the original volume. (The main one recently has been positive. 185g 6pk museli bars were upgraded to 210g 6 pk, home brand.)
 
Not every item is available every week. Some are seasonal. We make occasional subsitutions (especially around fruit and veg - eg: pears = apples depending an avails.), and we choose 'specials' over standard products when available. The base list chooses home brand as its primary item, when available.
 
All this substitution does mean a slight wandering away from the base list at times, but we think that is a more realistic assessment of how people actually shop. These 'wanderings' are not controlled for the NZ and AU versions, so there is a possibility of minor comparison difficulty. But each week, we do start from the same base list.
 
We are also testing a third (not 'healthy food') list weekly too, one provided by a reader many months ago. That list shows similar trends overall, but often is dissimilar week-by-week.

Middle Class - it sounds so

Middle Class - it sounds so awfully beige.

The average distance a woman

  • The average distance a woman in Africa walks to get water is 5.5km

 

  • one out of four people in the world don't have electricity

 

  • 22,000 children die every day from poverty

middle-class complaints - the price of milk just went up 10c, the cost of insuring the car/house/bach/boat/ketski is outrageous, my childs mobile phone bill is ridiculous, I spend a fortune on disposable nappies etc

It's no wonder more and more people in the west need SSRIs to get through the day. My God, the pressure...

 I spend a fortune on

 I spend a fortune on disposable nappies
 
But isn't it such a comfort to think you can work right through without those annoying breaks.

I have a question on this

I have a question on this piece.
Nolan states that 'real' incomes have risen significantly. So presumably this is income adjusted for inflation?
My first question was - "isn't housing inflation excluded from the CPI, and therefore this would not take into account the rapid house price inflation of the last 14 years?"
But I've just down some googling and apparently a house price index IS incorporated in the CPI. So when Nolan says "middle/median household can effectively afford 27% more goods and services now than they could in March 1998" that is after the effects of house price inflation have been factored in????
Can someone clarify?   
 

No, a "house price index" is

No, a "house price index" is not part of the NZ CPI calculation.
 
You may be mistaking what the housing components are in the index. They cover the costs of occupying, owning, and maintaining a residence, but not the price of the property itself.
 
See: http://www.stats.govt.nz/browse_for_stats/economic_indicators/CPI_inflation/ConsumersPriceIndex_HOTPSep12qtr.aspx and follow the links to the components and explanations.
 
The key elements are in the "Housing and household utilities group" and the "Household contents and services group". There is considerable detail about the components on the Stats NZ website. Rent is included, as are most aspects of owning a house including Rates.
 
Remember, this is a consumer price index, tracking what people normally spend. People don't 'normally' buy a house - it is a very rare transaction for most people. Just a few times in a lifetime. They certianly don't buy one every quarter.
 
There are other reasons to be sceptical about the CPI, but not having house prices in there is the right move. I used to be more sceptical until I started doing the weekly grocery price tracking. But when I compare it to what the food price index shows, and the broader categories the CPI covers, I am much more comfortable that Stats NZ is getting it about right.

but 'normally' a lot of

but 'normally' a lot of people pay a mortgage on that house each month...

but the components of

but the components of maintaining the house is "true" and fairly non-volitile and non-seaonale across the board.  The problem with looking at mortgage payments is 2 fold.
1) a) ppl with no mortgage dont pay a mortgage and you then have to figure out that % and correct. That % changes over time plus lots of other factors such as,
b) 15years ago when I took out a mortgage the maximum LVR I could get was 80% and 25 years, now its 95% and 30 years, hence you have to take that out...
2) boom and bust...inflation is measured across the board, and the % sectors contribute/effect GDP change with time plus bubbles....yet more factors to correct.
You then come back to what are you trying to measure.....
regards
 

David Thanks. Therefore one

David
Thanks.
Therefore one has to question the extent to which the financial position of the "middle class" is better now than 14 years ago despite real income increase of 27%, given that housing prices and rents have increased so much. And of course, the answer would vary from person to person. If you were a middle income earner 14 years ago and you bought a house then, then you are likely on average to be better off today in relative terms than you were 14 years ago, all things being equal. But if you are a 25 year old single middle income salary earner today, without any significant inherited wealth, and not owning a house, then relatively speaking, on average you are likely to be significantly worse off now.
However, the benefit system complicates things too. I had my first child age 25 in 1996, had only been working for 3 years. Back then I was earning too much to get any sort of assistance, even though I wasn't really earning that much! If I was a 25 year old today earning 40K with a baby, then I'd get a very useful WFF benefit - so although the cost of housing etc is much higher, such costs in that example are mitigated by the existence of WFF
So, given all those complexities, I would suggest it would be very hard to establish to what extent the "middle class" of 2012 is better or worse off than the "middle class" of 1998.   
Although I'm sure a very clever economist could devise a way of modelling this :)
 
 

I've dug deeper and the CPI

I've dug deeper and the CPI includes expenditure on newly constructed dwellings (I haven't had time to see whether it includes the land price as well, or just the physical build cost), but not existing homes that are sold and purchased. So........isn't this problematic re: Auckland? Not many houses are being built, therefore little inflationary effect from that is showing through. Yet at the same time house prices of existing homes are shooting up. I can understand the logic of not including the sale and purchase of existing homes in the CPI, but it still seems a bit short sighted to me given that increasing housing costs are essentially "turned a blind eye" to. And rent is not necessarily a very good proxy for house price movements - there were many years in the early mid 2000s when house prices soared and rents didn't go up much
Sure, people don't sell and buy houses every quarter, but on average kiwis move house something like every 7 years. Is that THAT different from the cycle of car buying. Cars are included in the CPI.  
I found it interesting that the CPI accounts for net shifts in the proportion of properties that are rented versus owner occupied. So.....as is usually the case, if house prices rise then you will usually see a shift to a greater proportion of people renting. If that occurs, then that shift together with increases in rents will increase the CPI. So that is an example of how house price increases can have an indirect (albeit not necessarily large) effect on the CPI.  

Define middel class, appears

Define middel class, appears here we are using household income as a proxie. If there is no survey on family balance sheet positions the whole point is lost. I have many stats on  our clients in NZ and USA. Timing and position on housing in itself often defines relative wealth and lets be real about inflation and use some relevant stats. As a trained economist I could data mine it either way. However as a practioner the balance sheets provides context, it defines options and opportunities, real income is only part of the picture.

I confess to being pleasantly

I confess to being pleasantly surprised at both the lift in incomes, and especially in the apparent equality in that lift. Especially as it also presumably is in NZD, where the US figures will of course be in USD. Given the appreciation of the NZD in that time, the lift here would be greater still in USD terms at least (although no greater in spending power presumably given the inflation adjustment of each).
I wonder slightly whether household makeup has changed materially in that time- more workers per household here perhaps than 10 years ago; but that seems unlikely to be significant. You also could wonder at the tail, as opposed to the median. The tail just may have reduced in income, and be the suffering lot, balanced by some lift in the top decile perhaps. But again, I have no data to test that thought.
Anyway, interesting article, Matt, thanks, and on the surface, a positive one.

So clearly house prices are

So clearly house prices are not considered when we talk about  "core" inflation...

  "This squeezing of the US

 
"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."
Really? In 1993 the average wage was just under $10 an hour and house prices were????food costs were????
Today in  2012 the minimum wage is still under $13 an hour and YOU CLAIM the NZ "middle class" has not been squeezed just in regards of living costs, house prices and general inflation? 
Have you been living on Mars Matthew? I suggest you go work for the RBNZ cause they are always looking for new BS artists to talk through their own asses!
The US is the US. Comparing apples with oranges aint exactly making any great point.
Example: Does the US FED also leave actual house/property price inflation off their CPI figures to worp the actual' reality'   in favour of Banks interests and financial manipulations such as the OCR? 
This game of monetary deception is so fraudulent that it borders on a travesty of justice and outright criminal intent
 

I have a great deal of

I have a great deal of difficulty accepting that wide swaths of the southern and middle parts of the “affordable” ( refer Demographia Housing Survey www.demographia.com ) United Sates mifdle class are not as well off as the middle class here.
 
We know for example that Houston (GMP $US 384 billion economy with 6.1 million people) is currently growing at around 8.5% annually.
 
Joel Kotkin wrote a rather instructive article regarding southern USA recently for the New York Times The Third Coast  ...
 
http://online.wsj.com/article/SB10001424052970204712904578092951334042918.html?mod=googlenews_wsj
 
...and earlier.... Cities where the income stretches the furthest ...
 
http://www.newgeography.com/content/002950-the-cities-where-a-paycheck-stretches-the-furthest
 
I do wish people such as Matt Nolan and other economists would add Auckland, Christchurch, Sydney and Melbourne to the list of Kotkins article above of US cities using the same methodology....  to show Kiwis and Aussies so called “middle class” just how much poorer they are.
 
My “gut feel” is that what it would take a Houston household to live on for $US50,000, would require about $NZ120,000 for Auckland and about $A150,000 for Sydney. The costs overall are just so much lower in places such as Houston and other affordable cities through southern and middle USA. California for example is a different story.
 
Hugh Pavletich

I find it interesting that

I find it interesting that Stephen L and Hughey make the same mistake: to accept 'incomes' as an unchallenged 'given'.
Let's define 'income', shall we?
How about:
 
Exchanging part of your life for an artificial proxy; understood to represent processed parts of the planet.
 
Would that do?
 
Seems to me, the key part then would be access to, or ownership of, that which does the processing. Well, whaddya know. Texas has (a dwindling supply of) close to the surface, close to demand, easily cracked, oil. How about we do a demographic of proximity to energy vs cost of living? While we're at it, how about counting 'avoided costs' too?

PDK, Fair points. I have

PDK,
Fair points.
I have been, as you may have noticed, somewhat critical of the National government over time, and perhaps have been something of a gloomster (as GBH calls them) in the process. So was happy to acknowledge evidence that a degree of equality (an important measure of social cohesion to me) has at least not got worse in the last decade or so, and there has been income growth (as usually financially defined) for that period. Credit to both Labour and National then. I suspect considerable credit goes to the working for families tax credit system in keeping the working lower middle classes at a reasonable level of income relative to everyone else. By the by, although most would describe me as left leaning, I do think the non working who live only on government welfare, should do it a bit tough; and I understand for the most part, they do. There needs to be good incentives to work. 
Whether our "income", which seems overly based on housing improvements and dairy production, using debt financed by foreigners, is financially sustainable is still very moot. If the current account deficit of 6% predicted makes up most of the growth, then that is not such a good story, and still needs real debate and RB and government attention in my view.
And that's without really getting into your energy and other resource shortages; will leave that to you, as you always do it better.
 

I remember mentioned here

I remember mentioned here last year that I was involved in moving a clients headoffice from from NZ to Houston, they have experienced what Hugh is talking about, the greatest benefit fell on the mid-range professionals.
I'm surprised there has not been greater pushback on the quality of this article.

We cannot let the truth get

We cannot let the truth get in the way of spin or aspire to a wage that facilitates a reasonable standard of living consistent with that displayed in the advertisements we are continually exposed to.

Of course, SH, advertising is

Of course, SH, advertising is seen by some as an incitement to Revolution:  the constant, beautifully engineered (from a pysch POV) insertion of unattainable (for a good proportion) states, into monkey brains finely attuned to Us-Them, and Who's Got Wot, and Who Owes Me/Who do I Owe, leads to Consequences.
 
Sooner or later, the inevitable conclusion is reached by some, that instead of buckling down and trying to Earn enough to pay another Maker, to get all these Goodies, why not just disintermediate the chain and Take it off of the Owner, directly.
 
Wheeee!
 
Free Stuff!
 
Mind you, the 'hood does then suffer, a tad.
 
Call it a Historically Proven Pattern.....

Spexkes.....many thanks for

Spexkes.....many thanks for that.
 
tTe Government really does need to reverse the vicious cycle of - Local Government inflation leading to housing inflation then leading to general inflation.
 
There needs to be a huge push to sart on the path of making our urban areas far more internationally competitive - so that in turn our export sector is more competitive.
 
They should have been on to all this stuff out of the 2008 election of course. If only we had a Prime Minister who could speak the English language and articulate the issues effectively.
 
Grinning your way to grpwth clearly doesnt work Mr Key.
 
Hugh Pavletich

Hugh, Matt Nolan I believe

Hugh,
Matt Nolan I believe made it clear enough that he was looking at the relative changes between the US and NZ; he could perhaps have made it clearer by explicitly stating that the starting and finishing points in absolute terms were and are of course different.
Tradingeconomics.com reports GDP per head at purchasing power parity in the US of US$48.4k; while NZ is $US30k. So their median household income is likely to be significantly higher than ours; albeit the Nolan article suggests their average may well be skewed up by the top 10% of income earners, and certainly is over the last 10 years.

Stephen l.... many thanks for

Stephen l.... many thanks for that.
 
It is a pity matt Nolan didnt make it clearer the REAL massive disparity in incomes. And there is a world of difference between the likes of California and Texas for example.
 
i have difficulty avvepting the real incomes of Kiwis have lifted as much as Matt suggests,
 
Hugh Pavletich

Smoke and mirrors. Go and

Smoke and mirrors. Go and talk to the actual people you refer to as "middle class".
Sorry, but this smacks of what I said some while ago, that the bashing of certain groups in society would move up the food chain.
You can trot out all the "facts and figures" you want but it won't alter the fact that a good portion of our middle class moves to Aussie to improve their lot.
 

Agreed - most New Zealanders

Agreed - most New Zealanders are poverty stricken and need to move offshore to pay their own debts and remove themselves from the obligation of unsurmountable collective national debts - the RBNZ debt figures are irrefutable when virewed on a per-capita-basis given median income levels. .