Understanding Changes in the Distribution of Household Incomes in New Zealand between 1983-86 and 1995-98

This paper was produced as New Zealand Treasury Working Paper 01/21

This paper presents an analysis of changes in the distribution of gross household income and income inequality over the period 1983 - 1998.

The analysis applies a semiparametric approach to study the effects of changes in the distribution of household types, and changes in National Superannuation (old age pension), household socio-demographic attributes and employment outcomes, and in the "economic returns" to such attributes and employment outcomes on the distribution of income, and uses kernel density methods to estimate these effects. This approach provides a visual appreciation of the shape of the income distribution, and is important in understanding how each of these factors affected different parts of the distribution over the period. We also estimate the effects of each of these factors on changes in various summary measures of inequality over the period.

The results find that changes in household structure (particularly the declining proportion of two-parent families), attributes, and employment outcomes each contribute to the observed increase in inequality, while the changes in returns are estimated to reduce the level of inequality. Collectively these factors account for about 50 percent of the observed increase, depending on the measure of inequality used. The results confirm other research findings that the changes were concentrated during the late 1980s.