The real incomes of about 67% of households in 25 advanced economies were flat or fell between Y’s 2005 and 2014. This phenomenon could have very damaging economic and social consequences.
The data shows that most people growing up in advanced economies since World War II have been able to assume they will be better off than their parents.
And for much of the time, that assumption proved correct, as buoyant global economic and employment growth over the past 70 years saw all households experience rising incomes, both before and after taxes and transfers.
Between Y 1993 and 2005, all but 2% of households in 25 advanced economies saw real incomes rise.
Yet this overwhelmingly positive income trend has ended.
A new McKinsey Global Institute report, Poorer than their parents? Flat or falling incomes in advanced economies, finds that between Y’s 2005 and 2014, real incomes in those same advanced economies were flat or fell for 65 to 70% of households, or more than 540-M people (exhibit).
And while government transfers and lower tax rates mitigated some of the impact, up to a 25% of all households still saw disposable income stall or fall in that frame.
These findings provide a new perspective on the growing debate in advanced economies about income inequality, which until now has largely focused on income and wealth gains going disproportionately to top earners.
McKinsey’s analysis details the sharp increase in the proportion of households in income groups that are simply not advancing—a phenomenon affecting people across the income distribution. And the hardest hit are young, less-educated workers, raising the specter of a generation growing up poorer than their parents.
While the recession and slow recovery after the Y 2008 global financial crisis aka the Great Recession 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 economic and social impact is potentially corrosive.
A survey McKinsey conducted as part of its research found that a significant number of those whose incomes have not been advancing are losing faith in aspects of the global economic system. Nearly 33% of those who are not advancing said they think their children will also advance more slowly in the future, and they expressed negative opinions about free trade and immigration.
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% over the next decade. Even if economic growth accelerates, 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.
The encouraging news is that it is possible to reduce the number of people not advancing.
Labor-market practices can make a difference, as can government taxes and transfers—although the latter may not be sustainable at a time when many governments have high debt levels.
For example, in Sweden, where the government intervened to preserve jobs during the global downturn, market incomes fell or were flat for only 20% of households, while disposable income advanced for almost everyone.
In the United States, lower tax rates and higher transfers turned a decline in market incomes for 80% of income segments into an increase in disposable income for nearly all households.
Efforts such as these, along with additional measures such as encouraging business leaders to adopt long-term thinking, can make a real difference. The trend of flat and falling real incomes merits bold measures on the part of government and business alike.
Source McKinsey Global Institute
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