Andrew Leigh

EQUALISING THE ANTIPODES: WHAT CAN NEW ZEALAND AND AUSTRALIA LEARN FROM EACH ANOTHER ABOUT REDUCING INEQUALITY?

PRESBYTERIAN SUPPORT NORTHERN SEMINAR SERIES ON CHILD WELLBEING
AUCKLAND

THURSDAY, 5 APRIL 2018

I acknowledge the Māori people, the traditional owners of the lands on which we meet, and thank our hosts, Presbyterian Support Northern, for inviting me to deliver these lectures.

In Eleanor Catton’s Booker Prize winning novel, The Luminaries, Crosbie Wells is writing back to his brother in 1854, explaining why he plans never to return to England. Naturally, he starts with the weather in Dunedin ‘The sun is bright on the hills and on the water and I can bear the briskness very well’. But then he turns to social class. ‘You see in New Zealand every man has left his former life behind and every man is equal in his own way. Of course the flockmasters in Otago are barons here just as they were barons in the Scottish Highlands but for men like me there is a chance to rise… It is not uncommon for men to tip their hats to one another in the street regardless of their station. The frontier I think makes brothers of us all’.

Ironically, it was in England that I first became interested in New Zealand inequality. Working with the late Sir Tony Atkinson, we began to explore long-run taxation statistics to ask whether the historical trends in inequality in Australia and New Zealand matched the myths. Was it true, as one 19^th century gold-digger had written home to England, that ‘Rank and title have no charms in the Antipodes’?

Our series starts in the early-1920s, when the tax data is available in a sufficiently disaggregated form to allow comparison across countries. At that point, we found that the top 1/1000^th of New Zealanders had incomes around 40 times higher than the national average.[1] In Australia, the share was similar. But in Britain, the top 1/1000^th had incomes about 90 times higher than the average.

Then came the great convergence. With only a few fluctuations, the half century from the 1920s to the 1970s saw a steady equalising of national incomes. In all three countries, the top income share fell dramatically. By the late-1970s, the top 1/1000^th of New Zealanders had incomes only about 10 times higher than average.[2] The Australian figure was almost precisely the same. And the British figure was only slightly higher.

Max Rashbrooke sums up some of the policies that underpinned this shift.[3] New Zealand Labour’s 1938 Social Security Act created a free health care system, introduced a universal family benefit, and extended aged pensions. More public housing was built, alongside unions achievements such as the eight-hour day. As political scientist Leslie Lipson put it, where New York had its Statue of Liberty, New Zealand might have erected a ‘Statue of Equality’ in Auckland or Wellington harbour.

This egalitarian era – in which wages grew faster on the factory floor than the corner office – was marked by significant social improvements. As the decades went by, ordinary families were more likely to own a home, a car, a fridge and a washing machine. An annual holiday away from home became the norm, rather a privilege confined to the very rich.  The prosperity of the post-war era was broadly shared across the community.

It has been a different story in recent decades. Over the past generation, the incomes of the top 1/1000^th have approximately tripled in New Zealand, as they have in other English-speaking countries.[4] Other metrics also show a rise in inequality.[5] Rapid deregulation of the economy, cuts to taxes and benefits, and a reduction in union power widened the gap between rich and poor. If you go to Baldwin Street in Dunedin, you can walk up the steepest street in the world. Similarly, a graph of inequality in New Zealand from the 1980s to the 1990s shows a rise as steep as we have seen anywhere in the advanced world. According to the Productivity Commission, the share of national income going to workers has dropped by 8 percentage points since the late-1970s.[6]

Last year’s Household Incomes Report, prepared by Bryan Perry for the Ministry of Social Development, found that the poorest tenth of New Zealand households had real incomes after housing costs that are lower today than they were in the 1980s.[7]  Meanwhile, real incomes for the top tenth of households are two-thirds higher than they were in the 1980s, after housing costs have been taking into account. Although much of the increase in inequality took place late last century, there is little evidence that things have shifted back since then.

Housing is a critical component of inequality today. One in 10 New Zealand children live in households where there is a major problem with dampness or mould. One in 12 live in households where the family often puts up with feeling cold to keep costs down. And one in 25 children do not have their own bed.[8] 

At the top, it’s another story. Research by the University of Otago’s Helen Roberts reveals over the period 1997 to 2013, real CEO compensation at listed firms rose 114 percent, nearly four times faster than average worker pay, which rose just 26 percent in real terms.[9] This parallels trends in Australia, where the average reported pay of ASX100 CEOs rose by 44 percent in real terms over the period 2001 to 2016, three times faster than average worker pay, which grew just 13 percent in real terms.[10] It is little surprise that two-thirds of New Zealanders believe that the government should reduce inequality.[11]

My collaborator on New Zealand inequality, Tony Atkinson, passed away on New Year’s Day 2017. His last book, Inequality: What Can Be Done?, moved on from describing the trends to discussing solutions. In the same spirit, my focus today will be on what we can do to reduce inequality in the antipodes. In particular, I want to discuss what our two countries can learn from one another about reducing the gap between rich and poor.

* * *

Let’s start with what New Zealand can teach Australia.

First, the quality of the data is far higher in New Zealand. If the first step towards breaking an addiction is admitting you have a problem, then the first step towards addressing inequality must be setting out the scope of the challenge. The annual Household Incomes Report, and its companion report using non-income measures, is as good as anything in the world when it comes to analysing inequality. That is to the credit of its author, Bryan Perry – but also to the willingness to invest in surveys that measure the multiple dimensions of poverty. These metrics include whether children have a waterproof coat, whether they can afford to eat fresh fruit and vegetables, and whether they could afford to play sport.

New Zealand has a history of investing in studies that track individuals over time, such as the 1972 Dunedin Longitudinal Study and the 1977 Christchurch Health and Development Study. More recently, Statistics New Zealand’s Integrated Data Infrastructure has linked up individuals de-identified data with data from a range of government and non-government sources. As Carmel Sepuloni’s incoming ministerial briefing noted, this has provided insights about the relationship between social housing and incarceration, between mental health and earnings, and between maternal services and childhood risk.[12] While these are not necessarily causal, they can point to areas that policymakers should explore. By contrast, Australia has been much slower to join up our databases.[13] Even at the same tier of government, there is often a reluctance to share data to build up a better picture of disadvantage. The example of New Zealand’s Integrated Data Infrastructure shows us what we might miss out upon as a result.

Second, I am impressed by the government’s focus on child poverty. Not only is Prime Minister Ardern also the Minister for Child Poverty Reduction, but her government has proposed a Child Poverty Reduction Bill that will require the budget to report progress on reducing child poverty. This is proposed to be done using the same approach as the 1994 Fiscal Responsibility Act (now the Public Finance Act), which requires the government to set targets for net debt, and publish its progress on meeting those benchmarks. As in the case of government debt, there will be no penalty for failing to meet the child poverty targets, but as we have found with the Australian Closing the Gap exercise, targets do focus government and public attention on the problem.[14]

It is not as though the child poverty rate is noticeably different in our two countries. According to the OECD, the child poverty rate – measured as the share of children living in households with disposable incomes of less than half the median – is 13 percent in Australia and 14 percent in New Zealand.[15]

Third, I am deeply impressed by how much further New Zealand has travelled in your nation’s recognition of its original inhabitants. Last December, my wife and I travelled around New Zealand with our three sons. We loved it, of course. But one of the most moving experiences for us was to take the children to Te Papa in Wellington. The boys were fascinated by the exhibition of the Treaty of Waitangi, and it naturally prompted the question from them: why didn’t Australia have a treaty like this?

It is not for want of trying. Last June, over 250 Indigenous leaders met in central Australia. The result was the ‘Uluru Statement from the Heart’, which called for a ‘First Nations Voice’ in the Australian Constitution and a ‘Makarrata Commission’ to supervise a process of ‘agreement-making’ and ‘truth-telling’ between governments and Aboriginal and Torres Strait Islander peoples. In October, it was utterly rejected by the Australian Government. As my colleague Senator Patrick Dodson observed, it was a ‘real kick in the guts’ for the Referendum Council. There is a lot that Australians can learn from New Zealand’s success in formalising the roles of Māori peoples in the nation. From the All Blacks’ Haka to the dual naming of places and organisations, there is a naturalness to the way in which New Zealand honours and celebrates its first peoples.

* * *

Now, allow me to step onto thin ice, as I risk playing the role of a foreigner trying to tell you what to do. If I offend, I have only one defence: it’s the reason our hosts brought me out here.

So, what might an egalitarian New Zealander learn from Australia?

First, you may be able to do more to target social expenditures towards the poorest. Peter Whiteford, an Australian National University expert who formerly worked at the OECD, has calculated the ratio of cash transfers paid to the poorest fifth of the population, and compared them to the cash transfers paid to the richest fifth of the population.[16] In some countries – including Austria and France – the rich get more government transfers than the poor. In the typical advanced nation, the amounts are about the same – meaning that cash transfers are neither progressive nor regressive. New Zealand is mildly progressive, giving about 1½ times as much to the poor as to the rich. But Australia spends 11 times as much in cash transfers on the poor as on the rich.

Because Whiteford’s analysis is based on OECD data, there is an inevitable lag, so it is possible that this comparison may be somewhat out of date. But even if there have been some changes, it is unlikely that cash transfers today are more progressive in New Zealand than in Australia. It suggests that there may be ways in which New Zealand can learn from Australia about how to better target government resources towards the neediest.[17]

Second, it may be worth New Zealand considering whether the balance of power in the workplace has shifted too far towards employers. This is particularly true when firms have substantial market power. In its 2017 Economic Survey of New Zealand, the OECD observed that ‘muted competition’ may be holding the economy back.[18] Uncompetitive markets don’t just mean higher prices for consumers – they can also mean that firms exercise a degree of monopsony power in the labour market.[19]

One area in which the pendulum may have swung too far is employment protection. One of the measures that the OECD calculates for its 34 member countries is ‘Protection of permanent workers against individual and collective dismissals’. New Zealand ranks as the country that provides least protection against dismissal, below even the United States, with its ‘at-will’ employment contracts. Australia isn’t much further up the list – ranking as the sixth-easiest country in which to dismiss a worker – but there is a significant difference between the two nations on this dimension.[20] With the labour share of national income significantly lower today than it was a generation ago, providing better dismissal protection is likely to strengthen the power of workers to collectively bargain for higher pay and improved working conditions.[21]

Third is to recognise the role that foreign investment plays in sustaining employment. As you know, the antipodes enjoyed among the highest wages in the world at the end of the nineteenth century. One reason for this was the high amount of land per person. While Europeans lived cheek-by-jowl, there was plenty of room to swing a sheep in Australia and New Zealand. In economic terms, one reason that wages were high was that the capital to labour ratio was high.

Today, both Australia and New Zealand have strong immigration programs. Migrants can fill skill gaps and start businesses, boost innovation and encourage exports. But they also have the inevitable impact of lowering the capital to labour ratio. To the extent that migrants are adding to the number of workers available to do a given job, this may put downward pressure on wages.

It was former Treasury Secretary Ken Henry who pointed out to me that foreign investment has the opposite effect. By increasing the available capital, it pushes up the capital to labour ratio. So by accepting foreign investment as well as migrants, a country can keep its capital to labour ratio constant, and therefore its wage rates.[22]

There are many vexed issues surrounding foreign investment, including national security screening, public attitudes and taxation paid by foreign investors. But as the OECD noted last year, ‘New Zealand’s inward direct investment stocks are substantially lower than in a number of other small, high-income OECD countries’.[23] They recommend steadily removing screening requirements on sectors such as construction and retail trade, demonstrating tangible benefits to the general public. They also advocate a public register of foreign direct investment to provide better transparency, allowing the general public to see who owns what. What the OECD fails to mention is that such an approach, if managed carefully, could conceivably also reduce inequality.

* * *

Finally, there are shared challenges that neither nation has dealt with particularly well. About one-third of the rise in inequality is due to the decline in union membership. Since 1980, the unionisation rate has dropped from 69 percent to 18 percent in New Zealand, and from 50 percent to 16 percent in Australia.[24] Put another way, it used to be the case that most workers in our country were union members. Now, five out of six workers are not in a union. Antipodean unionisation rates are still above the United States unionisation rate of 11 percent, but on current trends both Australia and New Zealand could be at that level within a decade or two. A continued fall in union membership rates is likely to put upward pressure on inequality.

In both nations, crime rates are falling for most offences, while the incarceration rate is rising. In our two countries, about 1 in 500 adults are currently behind bars.[25] This has a disproportionate impact on Indigenous Australians and Māori, since both groups are overrepresented in jails. Incarceration limits future labour market opportunities, since employers – particularly in service industries – are reluctant to hire ex-prisoners. Incarceration also impacts upon children. More men in jails means fewer fathers in the home.

Fiscally, rising incarceration imposes a substantial cost on the budget, with a night in a jail cell costing the taxpayer about as much as a five-star hotel. Justice experts are increasingly recognising that while a 20-year sentence costs twice as much as a 10-year sentence, it’s unlikely to have twice the deterrent effect.[26] Peter Gluckman, the New Zealand Prime Minister’s chief science adviser, recently noted that the past half-century saw criminal justice costs grow twice as fast as any other category of government spending.[27] Both Australia and New Zealand have more work to do in identifying policies that can reduce both crime and incarceration. This means better understanding the relationship between the formal and informal labour market, basing crime policies on evidence rather than emotion, and improving the quality of rehabilitation programs.

Australia and New Zealand also share the dubious distinction of slipping backwards in international tests of science, reading and maths. Over the 15-year history of the OECD’s PISA exam, New Zealand's average score for maths has dropped by 42 points – more than any other country. But Australia isn’t far behind, with a 39-point fall.[28] In Australia’s case, this continues a longer trend: since the 1960s, the literacy and numeracy of young teenagers has either flatlined or worsened.[29] John Hattie, who has worked in both countries, says that education policymakers ‘have sat back on our laurels’.[30] Many experts point to the importance of teacher quality in reversing these trends, yet neither country yet seems to be doing enough to ensure that the teaching profession attracts and retains the very best.

* * *

In a speech in Wellington four years ago, Labor leader Bill Shorten noted the commonality in how Australia and New Zealand approach the world. At our best, he observed: ‘We have shown a neighbourliness, and a courage, and a lack of prejudice, and a love of the outdoors and a life of the mind that has drawn to our region - not just tourists attracted by our natural wonders - but all those who admire our civilisation, our society. At its best a society working, without panic, without snobbery, without cultural warfare, in a spirit of affable consensus and decent communal care. We believe in the fair go, and a chance for all.’[31]

When I ask my economist friends why they believe in reducing inequality, they’ll point to the theory of diminishing marginal utility of income – that a dollar buys less happiness to a billionaire than a battler. Or they might point to the strong relationship between inequality and immobility, with the wasted potential that it entails.[32] In the words of one recent study, there are more ‘lost Einsteins’ in unequal countries.[33]

But as my New Zealand inequality collaborator Tony Atkinson recognised, the appeal of egalitarianism goes beyond the hip pocket. To most citizens, equality means something deeper.

A more equal society is one in which we recognise our common obligation to help one another – to lift someone up when they are down on their luck. It’s why our soldiers created their own ‘welfare states’ in the World War II prisoner of war camps. And it’s how we built social institutions in the first half of the twentieth century that were the envy of the world.

We might call it generosity, altruism or mateship. But it is no better summed up than with the Māori word aroha.[34] As Cleve Barlow puts it, ‘A person who has aroha for another expresses genuine concern towards them and acts with their welfare in mind, no matter what their state of health or wealth.’[35] Aroha is a fundamentally egalitarian idea.

Just as society is far more than a collection of individuals, a good life involves far more than the accumulation of wealth for one’s own enjoyment. A life lived together is a better life, and a nation that shares its prosperity is richer in every sense.

ENDS

[1] Atkinson, A.B. and Leigh, A., 2008. ‘Top incomes in New Zealand 1921–2005: Understanding the effects of marginal tax rates, migration threat, and the macroeconomy’. Review of Income and Wealth, 54(2), pp.149-165. For a more recent update of these figures, see Brian Easton, 2015, ‘Distribution of Pre-Tax Top Personal Incomes’, Policy Quarterly, 11(1), pp.47-51.

[2] Atkinson, A.B. and Leigh, A., 2008. ‘Top incomes in New Zealand 1921–2005: Understanding the effects of marginal tax rates, migration threat, and the macroeconomy’. Review of Income and Wealth, 54(2), pp.149-165.

[3] Max Rashbrooke (ed), 2013, Inequality: A New Zealand Crisis, Bridget Williams Books, Wellington, p.31.

[4] Atkinson, A.B. and Leigh, A., 2008. ‘Top incomes in New Zealand 1921–2005: Understanding the effects of marginal tax rates, migration threat, and the macroeconomy’. Review of Income and Wealth, 54(2), pp.149-165.

[5] See for example the New Zealand section of A.B. Atkinson, 2008, The Changing Distribution of Earnings in OECD Countries, Oxford University Press, Oxford; Christopher Ball and John Creedy, ‘Inequality in New Zealand 1983/84 to 2013/14’, New Zealand Treasury Working Paper 15/06, Treasury, Wellington.

[6] The comparison is from 1978 to 2016: Huon Fraser, 2018, ‘The Labour Income Share in New Zealand: An Update’, Research Note 2018/1, New Zealand Productivity Commission, Wellington.

[7] Bryan Perry, 2017, ‘Household incomes in New Zealand: Trends in indicators of inequality and hardship 1982 to 2016’, Ministry of Social Development, Wellington

[8] Bryan Perry, 2017, ‘Household incomes in New Zealand: Trends in indicators of inequality and hardship 1982 to 2016’, Ministry of Social Development, Wellington

[9]  Helen Roberts, ‘CEO Compensation in New Zealand: 1997 – 2015’, Working Paper, University of Otago, Dunedin.

[10] Ownership Matters, 2017, ‘CEO Pay in ASX200 Companies: ACSI Annual Survey of S&P/ASX200 Chief Executive Remuneration’, Commissioned by the Australian Council of Superannuation Investors. The analysis uses nominal figures reported on page 31, and then adjusts for inflation. Average wages from ABS, Wage Price Index, Australia, Cat 6345.0.

[11] As reported in the 2014 New Zealand Election Study: Bryce Wilkinson and Jenesa Jeram, 2016, ‘The Inequality Paradox’, New Zealand Initiative, p.63.

[12] Social Investment Agency, 2017, ‘Briefing on the Social Investment Agency for the Incoming Minister for Social Development’, Social Investment Agency, Wellington.

[13] The Gov 2.0 taskforce that the Rudd Government commissioned, and the National Information Policy that the ALP took to the 2016 election, were aimed at addressing these issues: https://www.alp.org.au/nationalinformationpolicy

[14] For a thoughtful discussion, see Brian Easton, ‘Submission to the Social Services and Community Select Committee on the Child Poverty Reduction Bill’, 23 March 2018        

[15] OECD Income Distribution Database, available at http://www.oecd.org/social/income-distribution-database.htm

[16] Peter Whiteford, ‘The Tax-Transfer System, Progressivity and Redistribution: How Progressive is the Australian Transfer System?’, Tax and Transfer Policy Institute Blog, 10 December 2015

[17] On tax progressivity, the two countries are quite similar. The OECD’s suggested approach is to compare the tax rate paid by a single person at 167 percent of average earnings with the tax rate paid by a single person at 67 percent of average earnings. In New Zealand, this ratio is 1.7 (23.6%/13.6%), while in Australia it is 1.6 (30.2%/18.8%): see OECD, 2017, Taxing Wages, OECD, Paris, Tables 6.1b and 6.3b.

[18] Quoted in Mark Berry, ‘Competition Matters 2017 – Opening remarks’, Commerce Commission biennial conference, Te Papa, 20 July 2017

[19] For a discussion in the US context, see Jay Shambaugh and Ryan Nunn (eds), 2018, Revitalizing Wage Growth: Policies to Get American Workers a Raise, Brookings Institution, Washington DC.

[20] The index is 1.01 for New Zealand and 1.94 for Australia. The highest index in the OECD is Belgium (2.99), and the OECD average is 2.27. All figures are for 2013, the most recent year available. See http://www.oecd.org/els/emp/oecdindicatorsofemploymentprotection.htm

[21] For an impressively long-run analysis of the labour income share, see Bill Rosenberg, ‘Working people’s share of income – a brief New Zealand history’, CTU Monthly Economic Bulletin, No. 190 (June 2017). See also Paul Conway, Lisa Meehan and Dean Parham, 2015, ‘Who benefits from productivity growth? The labour income share in New Zealand’, New Zealand Productivity Commission Working Paper 2015/1.

[22] Andrew Leigh, 2017, Choosing Openness: Why Global Engagement is Best for Australia, Penguin and Lowy Institute, Sydney.

[23] OECD, 2017, OECD Economic Surveys: New Zealand, OECD, Paris, p.37.

[24] New Zealand figures and past Australian rate from OECD Stat (OECD and J.Visser, ICTWSS database (Institutional Characteristics of Trade Unions, Wage Setting, State Intervention and Social Pacts), http://www.uva-aias.net/en/ictwss/). Current Australian rate from ABS Cat. 6333.0; US rate from Bureau of Labor Statistics, ‘Union Members Summary’, 19 January 2018.

[25] Alan Johnson, 2018, State of the Nation Report 2018, Salvation Army Social Policy & Parliamentary Unit, Auckland; Australian Bureau of Statistics, 2017, Prisoners in Australia 2017, Cat 4517.0, ABS, Canberra.

[26] Kleiman, Mark, 2009. When brute force fails: How to have less crime and less punishment. Princeton University Press, Princeton NJ.

[27] Peter Gluckman, Using evidence to build a better justice system: The challenge of rising prison costs, Office of the Prime Minister’s Chief Science Advisor, Auckland, 29 March 2018

[28] Simon Collins, ‘Dumbing down a generation: Performance of NZ schoolchildren plummeting’, New Zealand Herald, 18 March 2017

[29] Leigh, Andrew, and Chris Ryan, 2011, ‘Long-run trends in school productivity: Evidence from Australia’. Education Finance and Policy, vol. 6, no. 1, pp. 105-135.

[30] Simon Collins, ‘Dumbing down a generation: Performance of NZ schoolchildren plummeting’, New Zealand Herald, 18 March 2017

[31] Bill Shorten, Speech to the New Zealand Labour Congress, Wellington, 6 July 2014.

[32] Some point to other impacts of inequality, but the econometric evidence that inequality adversely affects outcomes such as infant mortality, homicide and savings is more fragile. See Andrew Leigh, 2013, Battlers and Billionaires: The Story of Inequality in Australia, Black Inc, Melbourne, Chapter 5.

[33] Alexander M. Bell, Raj Chetty, Xavier Jaravel, Neviana Petkova and John Van Reenen, 2017, ‘Who Becomes an Inventor in America? The Importance of Exposure to Innovation’, NBER Working Paper No. 24062, NBER, Cambridge, MA.

[34] Max Harris and Philip McKibbin, ‘The Politics of Love’, The Aotearoa Project blog, 20 May 2015.

[35] Cleve Barlow, 1991, Tikanga whakaaro: Key concepts in Maori culture. Auckland: Oxford University Press.

Authorised by Noah Carroll ALP Canberra