Equity, efficiency and social welfare: An application of generalised Lorenz Dominance to New Zealand incomes data 1984-1998

This paper examines the changes in the level of social welfare in New Zealand over the period 1984 to 1998 in the context of the country's economic reform process since the early 1980s. The earlier part of this period was also characterized by a largely policy-induced economic recession in New Zealand. In this paper, we make an attempt to identify the sections of the population that became better off in terms of real income, and those that became worse off during the period chosen. In addition, we examine the changes to the overall level of social welfare. The methods used are both ordinal and cardinal. The ordinal method is based on the criterion of generalized Lorenz dominance, and the cardinal method is based on a social evaluation function that provides complete ordering of all possible social states. The social welfare changes, derived with the help of the cardinal method, and measured in terms of real income, are then attributed to the twin influences of mean income changes and changes in measured inequality. In addition to showing up the dramatic increase in the Gini coefficient of income inequality overall, the results also track the changes in real income of the different income groups over time, and quantify how these changes, coupled with the increased inequality, affected the well-being of New Zealanders over a period of extensive economic reform. The study is based on unit record data from four Household Surveys conducted by Statistics New Zealand in the years 1983/84, 1991/1992, 1995/1996 and 1997/1998.