Poorer than their Parents? That was the question McKinsey & Company posed and attempted to answer in their July 2016 report titled: Poorer Than Their parents? Flat or Falling Incomes in Advanced Economies.
Here is the report’s key takeaway, which is illustrated in the figure below:
Our research shows that in 2014, between 65 and 70 percent of households in 25 advanced economies were in income segments whose real market incomes—from wages and capital—were flat or below where they had been in 2005. This does not mean that individual households’ wages necessarily went down but that households earned the same as or less than similar households had earned in 2005 on average. In the preceding years, between 1993 and 2005, this flat or falling phenomenon was rare, with less than 2 percent of households not advancing. In absolute numbers, while fewer than ten million people were affected in the 1993-2005 period, that figure exploded to between 540 million and 580 million people in 2005-14.
More specifically, McKinsey & Company researchers divided households in six advanced capitalist countries (France, Italy, the Netherlands, Sweden, the United Kingdom, and the United States) into various income segments based on their rank in their respective national income distributions. They then examined changes in the various income segments over the two periods noted above. Finally, they “scaled up the findings to include 19 other advanced economies with similar growth rates and income distribution patterns, for a total of 25 countries with a combined population of about 800 million that account for just over 50 percent of global GDP.”
The following figure illustrates market income dynamics over the 2005-14 period in the six above mentioned advanced capitalist countries. For example, 81 percent of the US population were in groups with flat or falling market income.
The next figure provides a more detailed look at these market income dynamics.
McKinsey & Company researchers also looked at disposable income trends, which required them to incorporate taxes and transfer payments. As seen in the first figure of this post, government intervention meant that the percentage of households experiencing flat or declining disposable income was considerably less than the percentage experiencing flat or declining market incomes, 20-25 percent versus 65-70 percent.
The researchers attempted to explain these trends by analyzing “the patterns of median market and median disposable incomes for two periods: 1993 to 2005 and 2005 to 2014. We focus on income changes of the median income household because middle-income households are representative of the overall flat or falling income trend in most countries, with the singular exception of Sweden.”
They highlighted five factors: aggregate demand factors, demographic factors, labor market factors, capital income factors, and tax and transfer factors. As we can see from the second figure above, labor market changes hammered median market income in the United States, the United Kingdom, and the Netherlands. And as we can also see, tax reductions and transfer payments helped to offset declines in median market disposable income in those three countries. In the case of the United States, while median market income fell by 3 percent over the period, median disposable income grew by 2 percent.
What is the answer to the question posed by McKinsey & Company? Most likely large numbers of people will indeed be poorer than their parents. Why? Aggregate demand continues to stagnate as does investment and productivity. Employment growth remains weak while precariousness of employment continues to grow. Finally, the elite embrace of austerity works against the likelihood of new progressive government social interventions. Without significant change in the political economies of the major capitalist countries, the next 14 years are going to be painful for billions of people.