Does Income Inequality Reduce Equality of Opportunity?

Recent publications suggest that the children who live at the bottom in economies with high inequality have reduced life chances.

The grandfather of modern distributional research is Tony Atkinson, a British economist who began in the 1960s a lifetime career studying the British and world income distributions and other related ones. He has been described as virtually single-handedly establishing the modern British field of inequality and poverty studies – it would not be a great exaggeration to say the ‘international’ field.


In truth much of his research – a combination of economic analysis, history, politics and statistics – has been tediously mapping out what has happened, none the less valuable for that, especially as the work has been in the scientific tradition of combining a passion for his subject with a ruthless search for what happened in a scientific sense (rather than what ought to happen).


Now in his seventieth year, he has broken out in an almost new direction in his book, Inequality; What Can Be Done? It still depends upon the scalpels of analysis, history and statistics of his earlier work, but its central focus is what the policy responses to inequality should be. He has fifteen specific proposals to which, with his usual scholarly caution, he adds a further five ‘possibilities’ which deserve further study.


 His package is much more revolutionary (and comprehensive) than that in Thomas Piketty’s Capital in the Twenty-first Century, although it is focused more on Britain than the world as a whole.* It would be foolish to advocate all twenty for New Zealand without careful adaptation for our different circumstances and, in my judgement, he does not pay sufficient attention to the global problem, although perhaps Britain is large enough to get away with some things that little old New Zealand could not.

Yet distributional economics is an evolving field, partly as new data bases evolve, past analytic problems are resolved and the world develops. Hence the concern, captured in Piketty’s book, about the global challenges. It is not just that better data bases enable the better understanding of the income distributions among and within countries, but that the rich have gone global too. (My guess is that ‘non-doms’, those who are not ‘residents’ in order to reduce the tax they pay, will become an increasing issue in public debate.)


Atkinson addresses another emerging issue. A common public stance, especially from the right, is that equality of income and wealth is not nearly so important (or is even unimportant); what matters to them is ‘equality of opportunity’. Usually the rhetoric goes on to imply that such equality is unusually high in New Zealand, or that we need to pursue policies such as better education.


It is hard to gather empirical evidence for how much inequality of opportunity there is, or where New Zealand ranks internationally. (If anyone can think of a cheap scientific way to do this they deserve a Nobel Prize – for peace.) An IMF Staff Discussion Note, which compared the income of one generation with the next, found us plumb in the middle of 13 countries. Those which did much better (that is, appeared to have greater income mobility between generations) were Scandinavian but Australia and Canada did slightly better than us too.


Moreover, there appears to be a negative correlation between income inequality and equality of opportunity on this measure. The IMF report goes on to argue, ‘higher inequality lowers growth by depriving the ability of lower-income households to stay healthy and accumulate physical and human capital.’


Time out for a moment. First, and inevitably, these studies are necessarily retrospective since they involve assessing what has happened to children who grew up in different circumstances in the past and are now adults. That means that they do not cover those who have suffered from the rise in child poverty as a result of the Rogernomics and Ruthanasia measures which markedly increased poverty among children. If the IMF paper is correct, there will be even greater inequality of opportunity for the post-1990 generations than for the earlier ones.


Second, measures of income inequality are crude insofar as they lump a lot of people together. By international standards New Zealand Superannuation is good at keeping the elderly out of poverty (because it is indexed to average wages not just to consumer prices).** That means we have a relatively higher proportion of children (and their parents) at the bottom of the income distribution. So the causal processes the IMF identifies must be even stronger for New Zealand than in countries which are less caring about their elderly.


The IMF report focuses on the impact on growth and concludes that there is ‘an inverse relationship between the income share accruing to the rich (top 20 percent) and economic growth.’ If the IMF estimates are correct, the effect of the distributional policies of Rogernomics and Ruthanasia was to reduce the GDP growth rate by about 0.8 percent p.a or GDP over five years. If the pattern continued through to today – the IMF research could not assess that – New Zealand’s GDP would be over 20 percent lower as a result of the neoliberal policies.


I am not sure we should jump to such a conclusion (and policies to turn the ship around will take a long time to have an effect). But in any case I would want to focus on the impact of New Zealand’s high inequality has on people’s life chances – especially through health and education – rather than the impact on GDP. The slowly accumulating evidence suggests that for those at the bottom of the New Zealand heap it ain’t good. As Atkinson says, you cannot reduce inequality of opportunity without reducing inequality of income.


* Piketty has a generous review of Atkinson’s book in the June 25 issue of the New York Review of Books.


** The 1972 Royal Commission on Social Security recommended a minimum income level for a single parent with one child of about $440 a week in today’s prices. In 1991 it was cut to $301 a week (net), again in today’s prices. It is currently $301 a week with $25 a week boost next April. (A beneficiary may be eligible for other supplements.) The Royal Commission recommended a minimum income level for a retired married couple in 1972 also of about $440 a week in today’s terms. It is currently $539 a week (net).