Peter Lyons: NZ's prosperity now limited to society's top half

In 1973, Fred Dagg was about to become a national icon. Photo / APN

In 1973 the Kirk Labour Government was in power. Many Kiwis were starting to protest against French testing of nuclear weapons in the Pacific. Fred Dagg was about to become a national icon.

The domestic purposes benefit was introduced. The number of unemployed was 1782. Top of the pops was Elton John's Crocodile Rock. Most cars on our roads were manufactured in Britain or Australia.

A four-bedroom house on the northern slopes of Mount Albert cost $41,000. A three-bedroom Grey Lynn villa cost $14,000.

Kevin worked as a builder. His annual income totalled $3300. His partner Jenny worked as a secretary. She earned $65 a week. Their three-bedroom bungalow in Avondale cost $21,000 in 1972. This was less than seven times Kevin's salary. Kevin drove a 1972 Holden Kingswood purchased for $2500.

There was nothing remarkable about Kevin except that in 1973 he was New Zealand's median income earner. Exactly half of Kiwi income earners earned less than him and half earned more.

Fast forward 40 years to 2013. Over the four decades, the New Zealand economy has undergone remarkable transformations. There has been a lurch towards free markets and reduced government intervention in the economy.

The economy is now one of the most open in the world through the removal of barriers to international trade and financial flows. Over the decades, the economy has also experienced significant inflation. The general price level for goods and services is now almost 12 times higher than in 1973.

Kevin's son, Rob, works as a warehouse supervisor. He is also remarkable in that he earns New Zealand's median income $42,000 a year. Academic studies in the United States show that the correlation between parent and offspring incomes can be as high as 50 per cent. A key determinant of your income will be your parents' incomes.

Rob is keen to live in the same suburb as his parents. Unfortunately, the asking price for an average three-bedroom house in Avondale is now $550,000 - more than 13 times Rob's annual income.

Given that all prices on average have increased by a factor of 12, then Kevin's income of $3300 in 1973 would have a purchasing power of $39,600 in 2013.

So in 2013, Rob is only slightly better off than his father in what he can buy with his income. He is likely worse off because the price of a house, which will be his major life purchase, is even further beyond him as a multiple of his income.

Kevin, Jenny and Rob are fictitious characters but the numbers are not. New Zealand has experienced significant economic growth over the past four decades. There has also been major pain with reforms, restructuring, downsizing, privatisations and deregulation.

Many of these changes were necessary. But the ultimate rationale behind economic reform was to improve the material prosperity of New Zealanders. Yet in real terms, the median citizen and those below him or her on the income ladder are little better off than their parents were 40 years ago. Their ability to own the roof over their heads has actually declined significantly.

A similar story has played out in other Western economies, including the US. The bulk of the gains in economic prosperity have accrued to those above the median.

In the post war decades, until the early 1970s, benefits of economic growth, which averaged 3 per cent a year, were generally shared across the board. In the past 40 years, increased prosperity has largely accrued to the better off in our society.

Peter Lyons teaches Economics at Saint Peters in Epsom and has authored several Economics textbooks.

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