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Poorer than their parents? (Dobbs et al.)

Poorer than their parents? flat or falling incomes in advanced economies by Richard Dobbs, Anu Madgavkar, James Manyika, Jonathan Woetzel Jacques Bughin, Eric Labaye, Liesbeth Huisman and Pranav Kashyap published by McKinsey & Company (6/2016).


“The debate over rising inequality in advanced economies has focused on income and wealth gains going disproportionately to top earners. In this research, we look at an aspect that has received less attention: households in developed economies whose incomes have not advanced when compared to their peers in the past. Examining this issue in three separate ways, we found a very substantial increase in the number of such households.

Between 65 and 70 percent of households in 25 advanced economies, the equivalent of 540 million to 580 million people, were in segments of the income distribution whose real market incomes—their wages and income from capital—were flat or had fallen in 2014 compared with 2005. This compared with less than 2 percent, or fewer than ten million people, who experienced this phenomenon between 1993 and 2005. Government transfers and lower tax rates reduced the effect on disposable incomes: 20 to 25 percent of households were in segments of the income distribution whose disposable income was flat or down between 2005 and 2014, compared with less than 2 percent in 1993–2005.

Today’s younger generation is at risk of ending up poorer than their parents. Most population segments experienced flat or falling incomes in the 2002–12 decade but young, less-educated workers were hardest hit, according to our second analysis, which segmented income from France, Italy, and the United States by age and educational attainment. Today’s younger generation is at risk of ending up poorer than their parents. The third way we looked at this issue was through a 2015 survey of British, French, and US citizens. It largely confirmed that perceptions were in line with the segment analysis. Almost two in five respondents felt their economic positions had deteriorated.

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, government taxes and transfers turned a decline in market incomes for 81 percent of income segments into an increase in disposable income for nearly all households.

Flat or falling incomes for the majority of the population could reduce demand growth and increase the need for social spending. Social consequences are also possible; in our survey, nearly a third of those who felt they were not advancing thought that their children and the next generation would also advance more slowly in the future, and they expressed negative opinions about trade and immigration.

The deep recession and slow recovery after the 2008 financial crisis were primary causes of this phenomenon, but labor-market shifts such as the falling wage share of GDP and long-term demographic trends of aging and shrinking household size also played a role. Before the recession, GDP growth contributed about 18 percentage points to median household income growth, on average, in the United States and Europe. In the seven years after the recession, that contribution fell to four percentage points, and even these gains were eroded by labormarket and demographic shifts.

Longer-run demographic and labor trends will continue to weigh on income advancement. Even if economies resume their historical high-growth trajectory, we project that 30 to 40 percent of income segments may not experience market income gains in the next decade if labor-market shifts such as workplace automation accelerate. If the slowgrowth conditions of 2005–12 persist, as much as 70 to 80 percent of income segments in advanced economies may experience flat or falling market incomes to 2025.

Policy makers and business leaders both have a role to play in shaping the discussion and helping create solutions. We detail options to boost productivity, GDP growth, and employment; enable workers to find better-paying work; and support disposable incomes of middle- and low-income households…”

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