Category Archives: income declines

20/7/16: McKinsey’s "Generation Worse"…

A new study from McKinsey looks at the cross-generational distribution of income as a form of new ‘inequality’, in words of the authors: “an aspect of inequality that has received relatively little attention, perhaps because prior to the 2008 financial crisis less than 2 percent of households in advanced economies were worse off than similar households in previous years. That has now changed: two-thirds of households in the United States and Western Europe were in segments of the income distribution whose real market incomes in 2014 were flat or had fallen compared with 2005.”

In other words, McKinsey folks are looking at the “proportion of households in advanced economies with flat or falling incomes” - the generational cohorts that are no better than their predecessors.

Key findings are frightening: “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.”

So that promise of the ‘sharing economy’ and the ‘gig-economy’ where people today are enabled to derive income (and thus wealth) from hereto under-utilised ‘assets’… pwah! not doing much. The ‘most empowered’ - web and gig-economy wise cohorts? Ah, they are actually the “worst-hit” ones. “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”.

For those of us who, like myself, tend to be libertarian in our view of the Government, McKinsey study tests some of our accepted ‘wisdoms’: “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.”

Except, may be it did not, because counting in disposable income while allowing for taxes and subsidies is notoriously difficult and imprecise. And may be, just may be, all the fiscal imbalances that were accumulated in the process of achieving these supports in some (many) countries will still have to be paid by someone some day?

There is a reduced connection between current growth metrics and income outcomes on the ground (don’t we know as much here in Ireland, with 26.3% jump in GDP in 2015?): “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 labor market and demographic shifts.”

And the forward outlook? Bleak: “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 slow growth 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.”

There are some wrinkles in the study. For example, in the U.S. case - cross time comparatives do not provide for the same data base, as pre-2014 data does not include state and local taxes. VAT and sales taxes are omitted across the board. And some other, but overall, the paper is pretty solid and very interesting.

So here is the key summary chart, positing the massive jump in the numbers of households on the declining side of market incomes:

And the chart showing that the taxes and transfers side of income supports is no longer sustainable over time:

Which brings us to the main problem: on the current trend line, politics of income supports from the fiscal policy side are unlikely to be able to contain growth in political discontent. Advanced economies are heading for serious tests of democratic institutions in years to come. Buckle your seat belts: the ride is going to get much rougher.