Story: Income and wealth distribution

Page 1. Factor income

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How is income distributed in New Zealand? There are no simple answers to this question because there are a number of different ways to characterise income distribution.

The first is factor income. In a market economy, factor income is the returns earned by the three factors of production:

  • land, which earns rents
  • capital, which produces profit
  • labour, which is paid in the form of wages or salaries.

Because the amounts from land rentals are small in New Zealand, they are included in capital.

Land, capital and labour

In 19th-century New Zealand, as in Britain, the division between land, capital and labour was considered important because income was seen as going to three social classes: land owners, capitalists and workers.

Before the Second World War

Information was not collected on wages or profits on capital for New Zealand before 1939. The first evidence was derived from payments of social security tax.

In Britain, the share of national income that accrued to labour had grown over time. However, this may not have been true in New Zealand, due to the high levels of self-employment and the Māori economy.

Wool boom

Between the 1949–50 and 1950–51 seasons, during the Korean War, prices for New Zealand wool more than doubled. This was not because wool was needed for military uniforms, as many thought at the time, but simply because the international tension created by the war led the United States to stockpile wool. The blip was temporary, and by 2008 wool prices in real terms were 6.2% of the prices during the Korean War boom.

Labour share after the Second World War

From the Second World War until the mid-1970s the labour share of income rose slowly, although there was the occasional blip – mostly because profits are highly volatile during business cycle upswings and downswings. An exceptional blip was in 1950–51, when farmers received very good incomes because wool prices were unusually high. When export prices plunged in 1975, employees’ share of income rose, because their real incomes did not fall as much as those of farmers. In the late 1970s labour’s share of factor income was at a record high – but in the 1980s and 1990s it fell (at a similar rate to its rise over the previous three decades).

Of every 100 workers in 2006, 21 were self-employed. If their labour income is included in the labour share, the changes are not so dramatic but the basic direction remains the same.

Return on capital

The other factor income is the return on capital, including rent from land.

The total return on capital is assigned to three groups, in roughly equal amounts:

  • house owners (owner-occupiers), equivalent to the rent they would pay if they rented their homes to themselves
  • domestic investors
  • foreign investors. In 2009 New Zealanders received only around 92% of the income the economy produced, and that proportion had been falling for many years. This is a net figure, with New Zealanders’ income from overseas investments subtracted.

New Zealanders also benefit from capital investment that does not give a market return, such as roads.

How to cite this page:

Brian Easton, 'Income and wealth distribution - Factor income', Te Ara - the Encyclopedia of New Zealand, http://www.TeAra.govt.nz/en/income-and-wealth-distribution/page-1 (accessed 21 September 2017)

Story by Brian Easton, published 11 Mar 2010