Inequality in New Zealand over the long run

The mainstream idea that income inequality is increasing in New Zealand seems difficult to counter. Despite the fact that the data doesn't any support for increasing inequality (see this post), people still prefer to believe it. That may be because concern about inequality has increased - people are more worried about inequality now than in previous decades, which makes it seem like it's a bigger problem than before, even if inequality itself has remained relatively unchanged since the mid-1990s (although as noted in this post, New Zealanders are less in favour of redistribution than they used to be).

Coming back to the point about how income inequality has changed over time, it is useful to look at the longer term. This post has a picture of inequality going back to 1984 (see also this post). However, this 2018 article by John Creedy, Norman Gemmell and Loc Nguyen (all Victoria University of Wellington), published in the journal Australian Economic Review (ungated earlier version here), outlines the longer time series back to 1935, based on the Gini coefficient measure.

Creedy et al. use data from the Official New Zealand Yearbooks (which I've noted before is an underutilised treasure trove of New Zealand historical data). Of course, they have to deal with changes in the definition of income and how it is measured, as well as who is included in the measurement. The biggest 'problem' is the introduction of the PAYE tax system in 1957/58, which leads to a huge increase in the number of people with low or no measured income being included in the data (the consequence is a large increase in measured inequality). They adjust their inequality measure back to 1935 by first calculating the ratio of the Gini coefficient for people with greater than £400 of income to the Gini coefficient for all taxpayers, based on data for 1959. They then applied that constant ratio to 1958 to get a measure of income inequality for all people for 1958. They then adjusted backwards from there by assuming the year-to-year proportional change in the Gini coefficient is the same for all taxpayers as it is for taxpayers with incomes greater than £400. [*]

Here's the headline graph of income inequality for New Zealand over the long term (Figure 4 from the article):

The change in measured inequality as a result of the introduction of PAYE in 1957/58 is clear. The higher of the two series prior to that is Creedy et al.'s adjusted series. There are several things to note from this graph:

Inequality is seen to be relatively stable from the early 1960s to the late 1980s, after which it rose to 0.47 in 1994... It is hard to escape the view that the increase was associated with the reforms that took place during the 1980s... Relevant changes included the gradual ‘flattening’ of the marginal income tax rate structure, with the top marginal rate falling from 66, to 48 and then to 33 per cent, along with benefit reductions and the end to centralised wage setting...

After 1994 the Gini is relatively constant again, except for a spike in the tax year 1999–2000. This spike is associated with the major income tax changes that raised the top marginal rate from 33 per cent to 39 per cent in 2000. This led to a certain amount of income shifting after the announcement of the change...

Also in relation to the spike in 1951:

This appears to be associated with particularly rapid increases in national income associated with a huge temporary rise in wool prices in 1950–1951... This spike in wool prices and farmers’ incomes would undoubtedly have had a large and disproportionate impact on income levels within the income distribution in 1951, but especially generating temporarily high incomes for wool farmers and related activities.

Overall, the general trends are clear though. Inequality was relatively high (perhaps similar to inequality today) in the 1930s and up to the early 1950s, then fell from the 1950s to the early 1980s. Inequality then rapidly increased back to its prior levels during the reforms of the late 1980s and early 1990s, and then has been relatively flat ever since.

The longer time series raises some interesting questions about current perceptions of inequality. Are people who are concerned about high (and 'increasing') inequality in New Zealand today remembering the 'idyllic' times of the 1970s and early 1980s, when inequality was historically low? Or, are people simply taken in by rhetoric from the U.S., where inequality has been increasing (albeit slower than you might think), without considering that New Zealand might be different?

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[*] It would have been interesting to see what it would have looked like if Creedy et al. had applied the method they used for 1958 to all years, rather than their assumed identical rates of change method. They note that:

...examination of the income distributions for early years reveals that the vast bulk of the distribution (around 50–75 per cent) of all income earners during the 1930s and 1940s had incomes below £400; with the percentage generally falling over this period as general income growth occurred. As a result, these early distributions generate unreliable Gini estimates for the sub-sample with x>£400... By the 1950s this proportion had dropped to 30 per cent in 1950 and to 12 per cent in 1957...