Thursday, September 11, 2014

Explaining Household Income

DS Wahid’s announcement over the preliminary results of the 2014 Household Income Survey (HIS) has created a minor furore (excerpt):

RM5,900 average household income? Lies, damned lies, and statistics, says MP

KUALA LUMPUR, Sept 9 ― The federal minister's claim that Malaysian households make an average of RM5,900 monthly is a farce that does not represent the actual earning capacity of most Malaysians, an opposition lawmaker said today.

DAP's Bukit Mertajam MP Steven Sim said the figure is a result of creative use of statistics in the 2014 Household income Survey (HIS) preliminary report to paint a “dishonest” picture of increased prosperity among the people….

…On Sunday, Minister in the Prime Minister's Department Datuk Seri Abdul Wahid Omar was quoted by national news wire Bernama as saying that the average household income in the country has risen to over RM5,900 a month, a significant increase from the RM5,000 monthly average recorded in the 2012 HIS.

Sim stressed that the figure does not make sense when the government itself admitted that 80 per cent of Malaysian households had benefitted from the Bantuan Rakyat 1Malaysia (BR1M) cash aid programme, whose recipients must earn less than RM3,000 a month.

He added that government statistics also showed that 82.5 per cent of Malaysians below the age of 30 earn less than RM3,000 a month as at September last year….

…Sim stressed that the median household income in Malaysia ― which stood at RM3,626 in the 2012 HIS ― gives a clearer idea of how much Malaysian households actually earn as it differentiates between low and high income earners….

Certainly it would be better to use the median rather than the mean to give a more accurate portrayal of the current state of household income.

However, that doesn’t much change the thrust of the results – while the median is much lower than the mean due to the skewness of the distribution (and nobody, I think, disputes this), I think growth will almost certainly be close to the same whichever measure you use. The growth across the two periods is really the more important point here, not the levels.

But I think there’s a more fundamental problem here than whether the results are political spin or outright lying. In the immortal words of Inigo Montoya, “I do not think it means what you think it means.”

To be more specific, the word income as used in the HIS – not just for Malaysia, but nearly the world round – is not exactly the same as the usage in every day language.

I could point out the obvious, that income ≠ wages. Most people would equate income with salaries and wages, as for most people this would be their main source of income. But household income also includes things like rent, interest and dividends, even if capital income is only really a big factor for the top 10% or so. Nevertheless, when we’re talking about aggregated data, some element of capital income is included, even if it doesn’t figure for the bottom 80%, and whether you use the median or the mean.

There’s also some element of business income. At the national level, “mixed income”, which covers income derived from everything from nasi lemak stalls to million dollar, multi-partner legal and accountancy firms, is about a third the size of wage income. Only about 2/3rds of Malaysia’s total labour force earns a salary. Everybody else is either running a registered business (about half a million people or so), or in the informal sector which is not well tracked. Put another way, you need to cut 20%-25% from household income to arrive at a figure approximating wage income.

But you could say that for the average Malaysian, none of these really make any difference. There would still be some discrepancy between the HIS data and what people are earning on the ground. So here’s what really sets apart income in the national statistics sense, and income in the everyday common usage sense. What’s that one thing?

Property.

Not in the form of rent (which is an explicit financial flow), but in the form of imputed rent (which isn’t). Home ownership in Malaysia (believe it or not) exceeds 70%, which means the flow of “income” derived from housing services goes far beyond the top 10% or even top 20% of the income distribution. In fact, for many in the bottom 40%, home ownership represents their only substantial store of wealth, and thus a major source of the disconnect between household income and wages.

Let me explain why: when you live in your own home, you are de facto receiving gratis a flow of housing services. This flow of housing services is represented in the statistics by imputed rent. In essence, you’re paying rent to yourself, and this “unearned” and non-financial income needs to be taken into account (refer here for a decent discussion on the subject). I know that sounds really strange, but the concept is embedded in the national accounts and household income data – it’s part of GDP, too. Again, I stress this is not a uniquely Malaysian practice, but is global best practice.

But there’s some method to the madness – if you live in a 5 room, 5 bathroom mansion with a lawn, the implied income flow you receive should be much, much higher than if you’re living in a 2 x 2 shoebox apartment, even if your “earned” income is the same. In accounting for this “income” flow, typically the actual rent of an equivalent property is used as a benchmark. One implication of this is that if actual house rentals go up – and they have indeed been rising in Malaysia though not quite as fast as house prices – so does the implied income from housing services, even if there are no actual money flows involved.

Imputed rent is a not inconsiderable proportion of Malaysian household income in the HIS. My crystal ball spits out an estimate of above 10% of average gross income (ok, it’s not a crystal ball, I’m just not allowed to disclose my source).

If you put all these differing strands together, you can form a rough guesstimate of average wages: take away 10%-15% of gross income for imputed rent, take away another 20%-25% for capital and mixed income, then divide by 1.8 (approximate average number of income earners per household).

For an average household income level of RM5900, that works out to an average salary per worker of between RM2,350 and RM2,100. The median is another 25%-30% below that, which gives approximately RM1,650-RM1,450. I don’t think that’s too far from where most people think Malaysian wages actually are. In fact, after accounting for growth, that’s more or less where the 2012 Salary and Wages Survey puts it.

To sum up, there’s really no inconsistency between the HIS numbers, which includes both earned and unearned income, and the numbers quoted for BR1M or from LHDN, which uses only earned income alone. Rather, the difference is really in how income is defined and computed.

If I have a criticism of our household income data, it’s that earned income is not disclosed along with gross income. Singapore for instance, reports both.

15 comments:

  1. For those who are interested, a study on impact of including imputed rent into household income:

    http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-RA-10-023/EN/KS-RA-10-023-EN.PDF

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  2. I am sorry. The explanation of you’re paying rent to yourself in unacceptable. That means when you are buying a property, you are paying double rental (1 to the bank and 1 to yourself). What if after I retire with no income and I am living in an expensive semi D? Am I consider an high income group just because I am paying rental to myself? To me it is more like a spin lie.

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    1. @anon 4.20

      Actually, paym,ent to the bank is for change in ownership, rental is for housing services. These are two separate expenditures.

      In any case, both of the above would fall under household expenditure, not income. For the example you quote above, that is precisely how you would be classified (and a pretty apt description for many Singaporeans).

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  3. From an individual perspective it is perplexing to say the least. However, from a national point of view and to make the in formation comparable across nations, that is how it is done, period.

    Zuo De

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  4. Foxy fella are you, dude. Fact is while there is a germ of truth in what you say regarding rental as imputed income, you leave out other germs that detract from that income, germs like depreciation due to obsolescence, maintenance costs, quit rent or poll taxes etc as that Bartlett chap put it. Wonder if the HIS takes into account those costs in their computations plus of course Pak Mat in his shack in some rural boondock isnt going to enjoy the same valuation as some fat cat high flying financier ensconced in a swanky joint, is he?

    I get the sinking feeling that this a roundabout way of introducing another tax into the equation to fatten them coffers as Bart seems to be proposing in your link. And that will top up the GST on Fuel proposal or some fancy crappy Carbon Tax in the works. Its all too transparently desperate to the masses, dude...the things wonks visualise.

    These sleights of hand wouldn't do mister for they will merely aggravate inequality and accelerate the inevitable. You see even the boffins of Bank Negara are beginning to wet their undies now:

    http://www.bernama.com.my/bernama/v7/bu/newsbusiness.php?id=1067806

    As I said yesterday in the thread below, just a matter of time before the Banes of this world rise up from the gutters. Smart aleck economists are not helping to stifle that angst a bit....As I said elsewhere, Man is "accursedly" unable to learn from History.

    Warrior 231

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    1. @Warrior

      1. Maintenance and interest costs are captured under the household expenditure survey. Depreciation falls under the capital stock accounts

      2. Valuations would definitely be different - that is after all, the whole point.

      3. You're seriously not thinking straight. The burden of a tax on imputed rent would fall mostly on those with higher value homes and those with multiple homes. This would reduce inequality, not raise it.

      Where's the fellow who was so gung-ho about taxing wealth?

      In any case, imputed rent has been a part of the national account statistics from the very beginning. So far less than a handful of countries have tried to collect an imputed rent tax.

      4. You do realise the the Governor is actually talking about increasing household access and exposure to the financial system?

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    2. The fellow who was so gung-ho about taxing wealth is hale and hearty, no small thanks to the grass and the likes of inhumane pro-capitalist rodents....hahahahaha

      Chill out dude, you are getting ahead of yourself on the inequality thingy. Modeling shows that the revenue impact of imputed taxation far outweighs its inequality equalizing promise. That is precisely what the taxmongers are after, MORE REVENUE and I wasn't far off at sniffing that as it goes down well with GST, Carbon tax etc:

      "The results provide evidence of a small
      inequality-reducing effect of net imputed rent
      taxation, which is strongest in the Netherlands and weakest in the United Kingdom, but consistent
      across countries. At the same time, a non-trivial increase in personal income tax revenues, ranging from about five percentage points in Germany (where a large proportion of the population lives in rented accommodations) to almost thirty percentage points in the Netherlands (due to the abolition of mortgage interest tax relief) is estimated. While additional fiscal revenues, raised without increasing
      income inequality, are of great interest to several European countries currently facing severe fiscal imbalances, other countries might be more interested in tax reforms capable of shifting the burden away from labour."

      But the tantalising lure of "reduced" inequality is often the bait dangled before the unsuspecting proles firsthand by pro-rich policy wonks. For ultimately, any benefits derivable from such a tax depends on HOW it is "distributed":

      "The way in which the additional tax revenues are returned to taxpayers - through a proportional rebate in tax liability for all taxpayers or through a lump sum non refundable tax credit - turns out to affect
      crucially the distributional assessment of net imputed rent taxation. Net imputed rent taxation and the removal of mortgage interest tax relief appear to be pro-rich when accompanied by a proportional tax
      liability rebate; while a lump-sum credit reduces inequality, with gainers mostly situated in the middle of the income distribution."

      And one need not be easily duped by the bait:

      While the proportional tax rebate reduced the marginal burden of tax on labour incomes on average by more than the lump sum rebate, the largest reductions were for people in high income households.

      The lump-sum tax credit scenario led to a decrease in METRs for people with low household incomes in some countries (Belgium, Germany, Italy), indicating that such a shift in tax burden from labour income to housing might lead to increased labour incentives for these individuals"

      http://ftp.iza.org/dp6493.pdf

      See! whatever the mode, the poor are no winners in any scenario at all with any benefit accruing to the middle class IF (and stress 'IF") they go via the lump sum credit mode which would amount to being as insignificant as the current BRIM chick feed.....hahahaha

      As for (2), valuations may be different but a once carefree Pak Mat may well possibly be lumbered with a tax burden for the pain of owning a ramshackle shack in the first place!!. in other words, a dragnet trawling to net more taxpayers especially those hapless shack owners in rural Malaysia......

      As for (4), read between the lines dude for lurking beneath the verbiage is an admission of sorts as to the consequences of "prolonging inaccessibility and exposure" (get my drift...wink wink).

      Warrior 231

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    3. Warrior,

      You provided me a heck of a lot of entertainment this weekend!

      More seriously, what you've discovered above is why I generally don't think taxes on wealth work well at all - too subject to arbitrary valuations, too easy to game the system, too easy for such taxes to become unfair.

      Though I do wonder - why bother to replace income taxes with wealth taxes (which is the thrust of that paper)? Why not a property tax on top of an income tax?

      It should be noted that taxes on imputed rent have never been politically popular, and very, very few countries have them, unlike VAT/GST. As I pointed out in the blog post, ownership of property is much more widespread than ownership of capital, which means such taxes reach deeper into the income and wealth distribution.

      On 4) I don't need to read between the lines. Financial inclusion has been part of BNM's strategy for decades, and the Governor has been a long-time advocate. This isn't some new concern, or tailored to recent events. You haven't been following them long enough.

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  5. I think the Minister, the MP and some of the commentators here are suffering from a dumb and dumber syndrome.

    Mean and Median differences aside (basic statistics 101), we can argue about the quality of the HIS/HES data till the cows come home. But average (or median) monthly household income is only one of the many indicators of development.

    Warrior's warning is the only one that counts for the majority lay person, unfortunately. A widening wealth gap is merely the symptom, if we cannot break the poverty cycle. The middle and lower income groups are screwed. Looking at US and other capitalist-driven countries, it seems that we are heading precisely in the same direction.

    BR1M figures and the exaggerated benefits of the cash transfer program aside, Malaysians must realize that the future promises no guarantees whatsoever. Government monies (and spending) must come from somewhere, and wherever they are from, it is all "our" money. If redistribution does not work, then the system is broken - kumbaya sing-song notwithstanding.

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    1. The subsidies saga is a never-ending song......

      It's not going to be resolved anytime soon, as Malaysians (rich and poor alike) have become "addicted" to "cheap" water, fuel and electricity.

      It's a political hot potato that the government is not willing to grasp.

      That aside, I would argue that education (relevant) is the best way to beat the inequality syndrome.

      The flip side, of course, is that there must be investments and incentives for the creation of good jobs in the country.

      Will that happen if the AEC (Asean Economic Community) comes into being?

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    2. @bee farseer,

      Our assessment is that the AEC won't have any big short term impact. There's too much heterogeneity among ASEAN economies for reforms to progress at anything over a snails pace. This will be nothing like tyhe path taken by the EU.

      AFTA has taken more than two decades to be fully implemented. I think that's the kind of timetable we'll be looking at.

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  6. It is precisely the piece meal and lip service approach to inequality that will ultimately kill societies everywhere and anywhere. Remember Marie Antoinette and cakes! Taxing and redistributing isnt going to work precisely because income generating and wealth creation resources are already loaded on the side of the wealthy.

    Education is not going to shift things much precisely because wage earners are being denied their equitable share of the spoils despite their higher productivity.

    A case in point is the desire to cap wages at 40% relative to GDP based on the Singaporean model for the sake of competitiveness. But Singapore has one of the highest Gini in the world! And the much maligned US and UK:

    http://themalaysianreserve.com/main/news/corporate-malaysia/6461-household-income-survey-includes-non-salary-income--return-on-investmentwahid-omar

    both outperform Malaysia despite having a 50% wage to GDP composition!!. And nobody mentions that in terms of technological readiness, Malaysia slipped 9 places down to 60th in the same competitiveness report! and no one is talking about bandwidths either given is vital role in a 21st century economy:

    http://www.theedgemalaysia.com/features/305944-malaysia-up-four-notches-in-global-competitiveness-ranking.html

    Ultimately, that 50% live below the median 4258 should be sobering enough and how many more are scrapping 4259 onwards to 5000 is a cause of endless wonder. And the actual poverty line income is a source of much conjecture.

    So there you have it in a nutshell...hahaha

    Warrior 231

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    1. @Warrior,

      Absolutely! But you seriously don't expect me to write a manifesto every time in the limited context of a blog post, are you?

      Oh BTW, Singapore (and Malaysia for that matter) are no where near the top in terms of lopsided income distributions. We're actually close to the global median. And no, I'm not a fan of the 40% COE target.

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  7. http://www3.weforum.org/docs/img/WEF_GCR2014-15_Global_Image.png


    Warrior 231

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  8. Because of your explanation. It created more confusion and havoc. http://www.themalaysianinsider.com/malaysia/article/ex-nst-editor-urges-putrajaya-to-give-true-picture-on-income-gap

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