The average Kiwi really is better off
By CHRIS WORTHINGTON - The Dominion Post | Saturday, 17 May 2008

Many people may feel they are struggling as the cost of living rockets. But on a wide range of measures, the average Kiwi is better off

Over the past five years, real income per person has risen by 10 per cent.

NEWSFLASH

People better off. We've recently been bombarded by tales of average Kiwi families battling with rising mortgages and sharply higher prices for food and petrol.

But is it really the case that New Zealanders are worse off now than they were a few years ago?

At the risk of giving away this article's conclusion too quickly, the answer is a rather emphatic "no". Over any reasonable time-span, New Zealanders' average real incomes have risen.

Statistics New Zealand produces a measure ideally suited for studying this issue with the cumbersome name of real gross national disposable income per capita.

It measures the value of what New Zealanders produce, adjusted for our foreign purchasing power (how much our exports buy relative to our imports) and our debt-servicing payments overseas.

So this measure captures both the aggregate effect of higher oil and dairy prices, and rising interest rates.

As the graph shows, New Zealanders' average real incomes have been steadily trending up for the past 15 years. In the past five years, real income per person has risen by 10 per cent.

Not convinced? New Zealand has two major surveys of incomes, and both provide the same evidence - recent income growth has been well in excess of inflation.

The Quarterly Employment Survey recorded average weekly wage growth of 3.9 per cent a year over the past five years; household income as measured by the Income Survey increased by 5.4 per cent a year over the 2003-2007 period. Inflation averaged only 2.7 per cent.

The "typical" Kiwi family has done even better: average incomes for couples with two children rose from $72,300 to $90,400 over this period, a 5.8 per cent annual rise.

Case still not closed? Let's deal with some common objections.

First, readers will have noted my use of the word "average" - is this just a case of the rich getting richer?

The data we have is not conclusive, but we have solid reasons to suspect otherwise.

Growth in the median household income (6.1 per cent a year) was actually stronger than the average household income over this period.

Falling unemployment tends to benefit the low-income households. And Working for Families, combined with fiscal drag, has increased the size of the transfer from rich to poor households.

Secondly, how can inflation have averaged only 2.7 per cent a year when petrol and dairy prices have risen 20 per cent-plus in the past year?

The consumer price index is based on a representative basket of goods (what people actually spend their money on), and many of the other goods and services people buy have been flat or falling in price. For example, clothing and footwear are on average 2 per cent cheaper than five years ago.

People notice the price rises of things they buy regularly but are less likely to notice price falls in items they buy infrequently - and that is where many of the price drops occur.

Appliance prices have fallen 7 per cent a year since 2003.

There are other biases in the cpi that result in a tendency to overstate inflation rather than understate it. Expensive items do not usually get included in the cpi till they have fallen in price substantially.

The cpi also assumes expenditure patterns remain fixed, but households switch to cheaper alternatives when prices rise. Real income growth, as usually calculated, is a conservative measure of improving living standards.

MORTGAGE RATES

Finally, what about the big rise in mortgage rates, which aren't part of the cpi?

Mortgage rates have risen substantially over the past five years - in fact, the comparison is slightly unfair to begin with, because we are comparing historically low interest rates with rates at the current cyclical peak.

Averaged across all households, we calculate that mortgage repayments have risen by about $88 a week in the past five years - still a lot less than the $320/week that average household incomes rose by (even if we control for inflation).

But only 37 per cent of households have mortgages, so the typical increase for these households is more in the region of $240/week.

That might seem back-breaking, but we estimate an average income for households with mortgages is now $100,000 a year.

But simply adding on the increase in mortgage costs this way is misleading.

Part of that increase reflects higher inflation, with no real effects on household income.

Another portion of the increase reflects higher costs of buying houses, part of which is already captured by building costs in the cpi.

Finally, some portion of higher interest rates is simply a transfer from households with debt to those with savings - which is why I began this article with a comprehensive measure of income that controls for interest payments due to foreigners.

There will be households with hefty mortgages, high petrol expenses, and dairy-rich diets that are sharply feeling the pinch, and a slowing economy may soon result in tougher times for all.

But the idea that the "typical" New Zealander's income is slipping backward is unnecessary and unrealistic scaremongering.

From here .