Tuesday 19 September 2017

Incomes and expenditures

There is a big known problem in New Zealand income and expenditure data. The big known problem is that incomes in the bottom decile are very badly reported. 

Some people will report large negative incomes because they are business owners who have had very bad years - but who often have other assets to draw on in bad times.

Other people are on mixes of benefits and informal income and worry about whether truthfully reporting incomes might have consequences.

Bryan Perry at MSD has been on top of this. I learned it from him - and from chats with John Creedy, if I recall correctly. Anyway, Appendix 8 and 9 of Perry's Incomes Report walks through the problem. Here's one of the implications of the problem: 46% of those reporting income at or below the lowest low-income measure (first column below) also report expenditure that is more than double that income threshold.

All of it means that you should use bottom decile figures with caution. If you're trying to track incomes at the bottom, I tend to go for the upper boundary of the second decile - as that won't be messed up by inconsistencies at the bottom.

And it means that taking expenditures on any category as a fraction of incomes is tricky. It can work fine in the middle deciles. But not so much if you're comparing things to average incomes for the bottom decile, or average income within the bottom quintile. Those averages get affected by what's going on in reported income. If you want to know the burden of food expenditures on households over time, it's better to look at it as a fraction of outgoing expenditures rather than as a fraction of income.

Kirsty Johnston at the Herald reports on high food expenditures among those on low incomes, and on malnutrition among poor kids. The overall stats are worrying. But I would suggest that she should correct this part of it:
The new health data comes as food prices continue to rise, with the consumer price index last week indicating food costs were up 2.3 per cent on a year ago. At the same time, income in the poorest third of households has remained flat since 1982.

Statistics New Zealand information released to the Herald shows for families on the lowest incomes (under $35,000), that means they're now spending 60 per cent of their income on food, compared to 48 per cent in 2007.

More than half of that goes on fruit and vegetables, data shows. Among middle-income families, 22 per cent of income goes on food, with one fifth of that on fruit and vegetables.
First off, it isn't true that income in the poorest third of households has remained flat since 1982. Here is real income growth, before housing costs, for each decile - but remember to be careful with the bottom decile figure. Again, this is from Perry. Real income growth has been at least 20% for each decile.
If you take instead After-Housing-Cost incomes, you have basically flat real income for the bottom decile, but real income increases from $14k to $17k in the second decile, from $16k to $20k in the third decile, and so on up the track. 
But the more particular problem is in comparing the expenditure measure on food with the reported income measure. The $35k figure Johnston reports would be the top of the first quintile (second decile). A mean household expenditure of $13.3k on food within that quintile is believable. But the same specialised Stats data pull suggests mean household total regular recurring income within that quintile of $22.8k. Maybe they adjusted the zero-incomes appropriately, but I'd expect they left them as-is unless they were requested to do something with them. 

Here's Perry on that. 
The bottom quintile's mean will have the same problem as the bottom decile's mean, but in attenuated form. Perry reports that are usually 20-30 households in the bottom decile reporting zero or negative income, and that the bottom decile sample will have about 250 households. The bottom quintile would then have about 500 in total, but the same 20-30 reporting zero or negative incomes.

Anyway, I'd suggest a couple corrections:
  • Note that real incomes have not been stagnant. After-housing-cost incomes have been flat for the bottom decile, if we trust bottom decile income figures, but real incomes otherwise have risen;
  • Compare food expenditures to total expenditures over time rather than to incomes. I suspect that, were the data pull across all expenditure categories rather than just food, the sum of all expenditures might have exceeded income for the bottom quintile. The 2013 Household Expenditure Survey is up here. Average weekly household expenditure for the bottom decile there is $476.20, so $24,762 annually (in 2013). That is higher than the reported mean household total regular recurring income that Johnston was given for the bottom quintile in the 2016 data.
  • The decile breakdown on proportionate expenditures on food might also need looking at. Among those in the bottom income decile, in the 2013 data, food expenditures were 19% of total expenditure. Among all income groups, food expenditures were 17%. 
And I wish that the 2016 HES data were up in the darned Stats tool that has a bit more disaggregated data than you can get from the main tables.

None of that's to say that there aren't real budget problems at the bottom. We just need to be careful with HES data. 

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