The rise of income inequality in advanced economies has generated serious debate and academic research, with much of the recent attention focused on the increasing concentration of wealth in the richest segments of the population. A new McKinsey Global Institute report Poorer than their parents? Flat or falling incomes in advanced economies, looks at a third aspect, which has not been as widely studied or documented.
The study found that between 2005 and 2014, the real income from wages and capital were flat or fell for 65 to 70 percent of households, or more than 540 million people. This compared with less than 2 percent, or fewer than ten million people, who experienced this phenomenon between 1993 and 2005. “But young, less-educated workers were hardest hit”, according to the report which segmented income from France, Italy, and the United States by age and educational attainment.
While the recession and slow recovery after the 2008 global financial crisis were a significant contributor to this lack of income advancement, other long-run factors played a role—and will continue to do so. They include demographic trends of aging and shrinking household sizes as well as labor-market shifts such as the falling wage share of GDP.
The flat or falling phenomenon could have corrosive economic and social implications. Along with questions about income trends, the researchers asked about people’s views on trade and immigration. The citizens who held the most negative views on both were the same group who felt their incomes were not advancing and did not expect the situation to improve for the next generation. More than half of this group agreed with the statement, “The influx of foreign goods and services is leading to domestic job losses,” compared with 29 percent of those who were advancing or neutral. They were also twice as likely to agree with the statement, “Legal immigrants are ruining the culture and cohesiveness in our society,” compared to those advancing or neutral. And as if that wasn't bad enough, those who were not advancing and not hopeful about the future were more likely than those who were advancing to support nationalist political parties such as France’s National Front or, in the United Kingdom, to support the move to leave the European Union.
Government policy and labor-market practices helped determine the extent of flat or falling incomes. In Sweden, for example, where the government intervened to preserve jobs, market incomes fell or were flat for only 20 percent, while disposable income advanced for almost everyone. In the United States, lower tax rates and higher transfers following the financial crisis turned a decline in market incomes for more than 80 percent of income segments into an increase in disposable income for nearly everyone.
If the low economic growth of the past decade continues, the proportion of households in income segments with flat or falling incomes could rise as high as 70 to 80 percent over the next decade. “But even if economic growth accelerates - says the report - the issue will not go away: the proportion of households affected would decrease, to between about 10 and 20 percent—but that share could double if the growth is accompanied by a rapid uptake of workplace automation."
How can policy makers and business leaders both make a difference? Beyond the well-known general remedies, the phenomenon of flat or falling incomes could be addressed through measures specifically aimed at low and middle-income households or the population segments we identify as being most at risk, including young people with low educational attainment, women, and older workers.
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