Inequality is at its highest level ever as low earners' pay packets decrease while high earners are paid more, a new report suggests.

Median household incomes fell 3 per cent, taking inflation into account, between July 2010 and June 2011, the Household Incomes in New Zealand: Trends in Indicators of Inequality and Hardship 1982 to 2011 report said.

That was the worst trend in more than a decade, as incomes rose steadily throughout the 90s at an average of 3 per cent a year, the Ministry of Social Development report revealed.

The report, prepared by Bryan Perry, showed that low earners' incomes fell between mid 2009 and mid 2011, while high earners pay packets increased.

It also painted a damning picture into child poverty, with 21 per cent of Kiwi kids living in poverty, compared to 15 per cent in 2007.

Critics have said the report shows the failings of the National Government, but Social Development Minister Paula Bennett hit back at those claims in Parliament today, saying that the real culprit was the international economic downturn.

"I think that what we have seen is that the effects of the global economy have really hit those people hard ... jobs were lost, people on part-time work lost some hours, and that, unsurprisingly, has had a direct effect on some of those people's household incomes."

Labour leader David Shearer said the widening gap was an indictment on National.

"Income inequality and poverty have a corrosive effect on the lives of individuals and society as a whole.  The National Government has sat back and watched New Zealand slide backwards - that's just not good enough."

Service and Food Workers Union National Secretary John Ryall said inequality and poverty was growing at an "alarming rate".

"Members of our union, many of whom are employed in the very lowest paid jobs in New Zealand, increasingly tell us they can no longer afford the basic necessities and struggle to provide school uniforms for their children or afford decent food," Ryall said.

"With inequality at its highest level ever, and the child poverty rate over 20 per cent, the report clearly backs what an increasing number of New Zealanders are saying: low household incomes are the problem."

A number of organisations had come together to launch the Living Wage Aotearoa New Zealand campaign next week, he said. They included the union, Auckland Action Against Poverty and Lifewise.

The report was based on data from Statistics New Zealand.

- © Fairfax NZ News