Inequality is one of the great challenges of our time. As I have noted before, there is no easy solution to the problem of inequality. That's because it isn't easy to target at its source, because the causes of inequality are numerous. So numerous, in fact, that when I summarise some of the main contributors to rising inequality since the 1980s (noting that in New Zealand, almost all of the increase in inequality happened by 1995, and inequality hasn't gotten any worse since then - see here, for example) takes up a good six Powerpoint slides in my ECONS102 class (and in quite abbreviated form).
In a recent NBR article (paywalled), Robert McCullough provides a useful summary of the key drivers in the New Zealand context:
Should a government wish to reduce inequality, then its causes first need to be identified. There are four leading suspects: globalisation, increased demand for skilled labour, higher pay for top executives and government policy on things such as taxes and minimum wages...
The first suspect, globalisation, refers to how our trade with low-wage economies can lead to the pay of unskilled workers in New Zealand being “set in Beijing”. The argument is that in a global economy, domestic wages can be influenced by overseas labour-market conditions. For example, when a Kiwi-based business can run a call-centre out of the Philippines then downward pressure is put on the pay of these types of local workers...
The second suspect behind high inequality goes by the phrase ‘skill-biased technological progress’. The argument is that there has been increasing demand in the past few decades for skilled workers, which has dramatically pushed up their wages compared with unskilled workers.
A big chunk of that demand is for people with maths and computer science skills. Leading up to 2008, those trained in mathematical finance were the top dogs in London and New York. Now they are being usurped by workers in fields such as artificial intelligence, at Google and other firms, some of whom are being paid on a par with American football stars...
A third reason for higher inequality relates to the job market for top executives. One of the world’s leading names on this topic, my former British examiner, Sir Tony Atkinson, who was invited out to New Zealand by the Clark government, wrote that, “as an English-speaking country, New Zealand chief executive salaries have been most likely affected by the internationalisation of the market for executives”...
A fourth cause of inequality is government policy. The RBNZ’s poorly judged, over-the-top, $100 billion ‘quantitative easing programme’ has caused wealth inequality to rise by increasing house prices. Tweaking the top tax rate will unlikely have much of a counter effect.
McCullough's argument is that the Labour government isn't working on reducing inequality, because they aren't combatting the sources of inequality. This argument is unfair. The sources of inequality are numerous, and not every source can be easily mitigated directly. Consider how hard it would be to try to reverse skills-biased technological change, for instance. In fact, the government could do a good job in reducing inequality without directly tackling any of its causes, by making the tax system more progressive. And arguably, that's what they have been attempting to do with the new top tax rate of 39%.
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