Brian Fallow: Why the have-nots will have even less

Today's unemployment figures are liable to make for unpleasant reading, not only as an indicator of how the economic cycle is playing out but also as a reminder of how fragile progress towards reducing income inequality may prove to be.

Economists' forecasts for where the unemployment rate will jump to, from 5 per cent in the March quarter, are clustered around the 5.5 to 5.7 per cent mark.

That reflects the combined effect of fewer jobs and a jump in the working age population as fewer Kiwis leave in search of greener pastures abroad. As a rough rule of thumb, a 1 percentage point increase in the unemployment rate represents another 23,000 people unemployed.

The big unknown is what will happen to the labour force participation rate, which reflects how many people of working age don't have a job but aren't actively looking for one either, which you have to do if you are to count as statistically unemployed.

We do know that over the June quarter the number of people drawing the unemployment benefit rose by 13,700 or just over 1000 a week.

At 51,000 the number of people on the dole is three times what it was a year ago, but a third of what it was 10 years ago.

There are some hopeful signs. Business confidence has improved and so, with a lag, have hiring intentions. But that is only compared with the recent past. By historical standards they remain abysmally low.

Payroll data released on Tuesday showed that aggregate labour income - employees' collective wages and salaries - rose just 1 per cent in the year to June, compared with 7.4 per cent in the year to June 2008 and 7 per cent the year before that.

This is not good for anyone chasing the consumer's dollar.

Forecasts for where the unemployment rate will peak are generally in the 7 to 8 per cent range, less than in the last recession after the Asian crisis and well below the 11.2 per cent in the early 1990s.

It is an enviably low rate by the standards of some Northern Hemisphere countries. But how high the unemployment rate gets is not the only thing that determines how much it hurts.

It also matters how much it increased to reach that level.

Following four years during which the unemployment rate was below 4 per cent, the increase this time is more than twice than in the Asian crisis.

Another factor is how much household debt levels have increased.

By its peak in 2007, the ratio of household debt to disposable income had climbed to 160 per cent from just over 100 per cent at the start of the decade and around 60 per cent in the early 1990s.

In part that reflects a confidence about future incomes, born of a tight labour market and chronic shortages of skilled labour.

But that was then and this is now.

In the June labour cost index released on Tuesday relatively few of the employers surveyed cited retaining or attracting staff as a reason for wage rises - if indeed there had been any.

Though few are immune in a climate like this, it is a fair bet that the brunt of this employment slump will be felt among those already on lower incomes, who often have less in the way of skills or experience to offer an employer.

Put another way, it is liable to widen disparities in income, which had narrowed a bit in the past few years.

There is a tendency among businesspeople to look back at the 1990s as a golden age of economic progress, which was then squandered in the present decade by a Labour Government more interested in redistributing wealth than creating it.

That is a viewpoint more plausible to people in the top income decile than those on low or middling incomes.

A report released last month by Bryan Perry of the Ministry of Social Development on trends in indicators of inequality and hardship reminds us that it was not until 2001 that real household disposable incomes at the median got back above where they had been in 1988.

The four lowest deciles lost ground over that period.

All in all, not much to show for 13 years of upheaval and hard graft.

By contrast between 2001 and 2008 the real median household income rose 21 per cent.

From 2004 to 2008 incomes for the lowest four deciles grew between 13 and 17 per cent, compared with 8 or 9 per cent for those above the median. It is the only period in the past 25 years when the incomes of low to middle income households have grown faster than those above the median, the report notes, and it reflects the impact of the Working for Families package.

The MSD paper also shows that income inequality is wider after housing costs are taken into account compared with before.

Remember this is a measure of income not wealth. It does not reflect the increase in property-owners' equity from the doubling of house prices in the most recent boom. It only reflect changes to rents and mortgage bills.

The housing boom, evidently, was not a rising tide that lifted all boats.

It boosted "imputed" rentals, as well as the cash variety. Imputed rentals is jargon for the fact that some of the return on investing in the roof over your head is avoiding the need to pay rent.

Unlike interest on bank deposits or a share of a company's profits, it is not taxed.

There is a case on both efficiency and equity grounds for changing that.

But don't hold your breath.