Why In­comes Stopped Ris­ing

Rotman Management Magazine - - FROM THE EDITOR -

1. Ag­gre­gate de­mand fac­tors.

When ag­gre­gate de­mand (or GDP) grows, em­ploy­ment and labour-force par­tic­i­pa­tion also in­crease, en­abling in­comes to rise. Con­versely, lower labour­force par­tic­i­pa­tion rates, ris­ing un­em­ploy­ment, and wan­ing pro­duc­tiv­ity (out­put per worker) can all lead to stag­nat­ing or fall­ing in­comes. Un­em­ploy­ment in par­tic­u­lar can have a damp­en­ing ef­fect on house­hold in­come.

2. De­mo­graphic fac­tors.

These cap­ture changes in the num­ber of work­ing-age peo­ple in each house­hold. This num­ber has fallen in sev­eral of our fo­cus coun­tries be­cause of the shrink­ing size of house­holds, the re­sult of chang­ing fam­ily struc­tures, lower fer­til­ity rates and ag­ing, which de­creases the num­ber of peo­ple avail­able to work.

3. Labour-mar­ket fac­tors.

These in­clude the evolv­ing pat­tern in labour de­mand and sup­ply. This is man­i­fested in the wage share of GDP and the me­dian house­hold’s share of wages. Among the forces that can ex­plain move­ments in these two fac­tors are in­come gains for high-skill work­ers and neg­li­gi­ble in­come gains or de­clines for low- and medi­um­skill work­ers, and the share of part-time and tem­po­rary work, which is of­ten less well paid than full-time work. Labour­mar­ket fac­tors can vary de­pend­ing on the role and in­flu­ence of unions, dif­fer­ent na­tional labour reg­u­la­tions and prac­tices, trade and im­mi­gra­tion, and the de­gree to which jobs are af­fected by au­to­ma­tion.

4. Cap­i­tal in­come fac­tors.

These in­clude cap­i­tal gains from as­set sales, in­ter­est and div­i­dends from in­vest­ments, rental in­come, in­come from busi­ness, or in­come received from pri­vate pen­sion plans.

5. Tax and trans­fer fac­tors.

Trans­fers in­clude a range of cash pay­ments to ben­e­fi­cia­ries such as so­cial se­cu­rity pay­ments, dis­abil­ity or work­ers’ com­pen­sa­tion, and un­em­ploy­ment ben­e­fits. The first three of these cat­e­gories—ag­gre­gate de­mand, de­mo­graphic, and labour-mar­ket fac­tors—con­trib­ute to changes in labour in­come. Changes in mar­ket in­come are driven by changes in this labour in­come, to­gether with changes in cap­i­tal in­come. Dis­pos­able in­come is the amount house­holds re­ceive af­ter taxes, and trans­fers are ap­plied to mar­ket in­come.

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