Last week’s ‘A More Inclusive New Zealand Forum’ brought together government, NGO and community representatives to discuss how to promote social and economic participation. The purpose was to get a variety of expertise in the room from economists, to policy wonks, to those working on the ground.
A lot of time was spent on how to address the problem: lack of inclusion. Much less time was spent on discussing whether it was really a problem in the first place.
When addressing complex social issues, there is bound to be a variety of opinions. But can there ever be a consensus on what inclusion is, and what successful inclusion would look like?
Whether by coincidence or design, on the same day, Motu released a report on “The Material Wellbeing of New Zealand Households”. The Motu study found that New Zealand has one of the highest material living standards in the world, though ranked averagely (twentieth out of forty) in inequality measures.
So, on the same day that many influential change-makers were coming together to discuss how to increase inclusion, a study was released saying New Zealand is actually a pretty great place to raise kids. According to the measure, New Zealand may not lead the world in equality, but we are near the top in our standard of living.
Using data derived from the OECD’s Programme for International Student Assessment (PISA) surveys, Arthur Grimes and Sean Hyland developed a new measure of material wellbeing. It has been used to illustrate the living standards and level of equality in forty countries.
Well known for ranking student educational achievement, the PISA surveys also ask a number of questions relating to the presence of household durables in the respondents’ home. The PISA study surveys fifteen year olds only, which provides a demographic control on results. These include goods such as books, cars, and number of bedrooms. The goods represent both a store of consumption and wealth.
There are many advantages to focusing on consumption inequality over income inequality. Consumption inequality measures the experienced differences in the way people live, while income inequality only captures one means by which people can afford their lifestyles.
Income inequality does not capture those who are asset rich, and can live comfortably even if their low reported income would place them in the bottom decile. It is also not very time sensitive, so would not capture people such as contractors, whose income is variable year after year. Consumption measures, on the other hand, account for consumption-smoothing behavior: the ability to draw on wealth and savings. If the intention is to increase inclusion in society, then consumption measures are a better representation of peoples’ lived experience.
The means of measurement is also important. The researchers use the Atkinson Inequality Measure (AIM) rather than the more common Gini coefficient. The Atkinson measure summarises the level of inequality, as well as different social preferences, and tolerance of levels of inequality. For instance, a society that increases in inequality may also experience an increase in living standards, so the Atkinson measure would account for the overall change in social welfare. While work by John Creedy at Treasury shows that the Gini coefficient can also be interpreted to account for these value judgements, it is less commonly used in that way.
This is an aspect that was missing from much of the discussion at the More Inclusive New Zealand forum. Inequality, and in particular income inequality was repeatedly finger-pointed as the main barrier to inclusion. As far as I could observe, there was little pause for thought to consider whether equality in a poorer country is better or worse than inequality in a richer country. Nor was there a consideration of the social welfare function, where society may be able to tolerate increased inequality if there is also a rise in living standards. Even egalitarian philosopher John Rawls ranked more unequal societies as more desirable if it lifted the living standards of the worst off in absolute terms.
While the Material Wellbeing Index certainly prioritises the right things to paint a picture of peoples’ lived experiences, it is not a perfect measure.
One problem is the way they measure household size. While the index did equivalise households, household size is only determined by assumptions. Equivalisation would give results of the survey different weighting depending on household size and members. The PISA survey did not gather information on household size, so assumptions had to be made based on reporting of living with relatives, and whether the respondent has their own room. Especially notable in a New Zealand context, the measure assumes there is no overcrowding in housing.
Another problem is that the inequality measure looks at the possession of items rather than the cost. The prices of items are used to measure marginal utility, but are treated as both time and country invariant. In other words, the prices of items are assumed to be unchangeable over time and country. In a context of economic growth and changing technologies, it is hard to believe this would be the case. It also means the measure is skewed at the top, as the distribution is truncated. The survey notes the presence of goods such as cell phones, but does not provide any weighting for quality. A $20 cell phone is treated the same as a $500 cell phone, even though an old Nokia provides very different functions to an iPhone.
Finally, there is a problem with over-emphasising international rankings over absolute scores. The way the report has been framed by the media, one would assume New Zealand is performing averagely in inequality measures (twentieth out of forty), even when accounting for society’s tolerance of inequality (which the Atkinson measure does). Yet, as the authors observe, there are only small absolute differences in the levels of inequality across the top thirty countries, and little observable difference between the other Anglo-Saxon countries such as Canada, the United States and Great Britain.
Inclusion is important, but it’s not everything
Although the methodology may not be perfect, this research paper is a welcome addition to the wider national conversation on inclusion. Do we care about inclusion for its own sake, or to the extent to which all New Zealanders enjoy an agreed minimum standard of living? Inequality must be considered not as an absolute measure, but adjusted to account for increases in overall material wellbeing.
The organisers of the ‘More Inclusive New Zealand’ forum should certainly be commended for acknowledging that some of the best solutions to policy problems will not come wholly from the public sector, but from a collaboration of different perspectives and expertise.
But before there can be any consensus on what to do, there first needs to be a much richer conversation on the trade-offs between equality and quality of living standards.
*Jenesa Jeram is a Research Assistant at The New Zealand Initiative. This is the Initiative’s weekly column for interest.co.nz.