The cost of living is increasing at its fastest rate since 1990. Inequality means more status competition, as people jostle in a high-stakes economy, argues Stewart Forsyth
Opinion: Combine high inflation with high unemployment and conditions are set for misery. In the 1970s through to 1990s in many countries, high inflation, low growth and high unemployment made it hard for many to find work or to get established.
Not all found this time so hard. Those with good education, good jobs, and a good credit profile could afford phenomenal interest rates to buy a house or set up a business. This meant a widening gap between those doing well and those struggling. Measures of inequality took off.
Inequality means more status competition. People jostle in a high-stakes world. As a new BERL paper makes clear – that’s not a good place to be. Trust plummets and the scene is set for populist leaders with further divisive solutions. Violent crime goes up. Health – both physical and mental takes a hit.
The figure shows New Zealand's income inequality, unemployment and inflation. Anthony Atkinson and Andrew Leigh have tracked income inequality – as the proportion of income earned by the top 1 percent of New Zealanders from 1921 to 2003.
Initially, income inequality trended slowly down, from the top 1 percent having more than 10 percent of earnings to around 5 percent in the early 1980s. At the end of the '80s income inequality headed up, breaking through 10 percent and then settling just below 10 percent in the early noughties.
Unemployment (1925-2022) is not reliably measured before 1945 (though it was higher than 5 percent). It was a steady 2-3 percent through the 1950s and 60s, then crept up from the late 1970s, lunged up in the early 1990s and then headed north again in 2008 (the global financial crisis).
Inflation, unemployment and income inequality in NZ
As Peter Martin, writing in The Conversation about Australian unemployment describes it, “unemployment went up by the escalator, and down by the stairs.”
It took years for New Zealand employment to get down below 5 percent after the highs of the early 1990s and immediately after 2008.
Inflation (measured as the consumer price index from 1960 to 2022) was even negative at times during the 60s and early 70s. Then it burst up to hover around 15% in the 70s and 80s. Led by New Zealand, central bankers around the world took control of inflation in the 80s and it dropped into various ‘target ranges’. This meant in New Zealand inflation was below 2% from 2012 to 2019.
“Democrats constitute people, by and large, who are around the median incomes or below. These are the ones whom the Republicans want to pay the price and burden of fighting inflation. The Democrats feel they have no choice but to to run some inflation (to increase employment); the Republicans do not.” – Paul Samuelson, economist
Economists have considered until recently that inflation and unemployment are inversely related. High employment has been correlated with high inflation – employers have to pay more and well-paid workers bid up prices in the economy. An approach to high Inflation is to run higher unemployment – which will reduce wage pressure, and ultimately prices. In Australia and New Zealand (and other countries), this scenario played out – the efforts from the mid-1980s to pull inflation down led to high unemployment.
At the same time, we can see that income inequality goes up (though, frustratingly this data set doesn’t cover recent years).
We are now moving into a zone where inflation is ticking up, as you might have noticed at the petrol pump or supermarket check-out (7.3% as of June 2022). Unemployment is down to 3.3% (June 2022).
Inflation is not great news, but the silver lining is that cross-national research indicates that inflation doesn’t boost misery as much as unemployment does. Research into European countries and a wider range of nations shows that unemployment is between 4 and 5 times worse than inflation in its overall impact on happiness.
Not all groups might experience this silver lining. If you have bought a house, you probably have a good job (ensuring your creditworthiness), and higher interest rates are going to hurt. You might have job security but you might be unhappy. If you are poor, and not able to afford big ticket items, the opportunity to enjoy secure employment (and rising wages) might be making you happier.
Paul Samuelson (you might remember his economics textbook) was quoted in 1977, as saying, “Democrats constitute people, by and large, who are around the median incomes or below. These are the ones whom the Republicans want to pay the price and burden of fighting inflation. The Democrats feel they have no choice but to to run some inflation (to increase employment); the Republicans do not.”
We will see a split in the proposals by different political parties about economic priorities. Some will focus on getting inflation down. Others will try to shift the focus to employment.
Higher levels of employment, if they persist, seem more likely to reduce inequality and the range of ills that produces.
