The great in­come stag­na­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

Nowa­days, the inequal­ity de­bate of­ten fo­cuses on the dis­pro­por­tion­ate ac­cu­mu­la­tion of in­come and wealth by a very small share of house­holds in the United States and other ad­vanced economies. Less no­ticed – but just as cor­ro­sive – is the trend of fall­ing or stag­nat­ing in­comes for the ma­jor­ity of house­holds.

For much of the post-World War II pe­riod, un­til the 2000s, strong GDP and em­ploy­ment growth in the ad­vanced economies meant that al­most all house­holds ex­pe­ri­enced ris­ing in­comes, both be­fore and af­ter taxes and trans­fers. As a re­sult, gen­er­a­tion af­ter gen­er­a­tion grew up ex­pect­ing to be bet­ter off than their par­ents. But, ac­cord­ing to new re­search from the McKin­sey Global In­sti­tute, that ex­pec­ta­tion may no longer be war­ranted.

Dur­ing the last decade, in­come growth came to an abrupt halt for most house­holds in the de­vel­oped coun­tries, with those headed by sin­gle women or com­pris­ing young, less ed­u­cated work­ers among the hard­est hit. Real in­come from wages and cap­i­tal for house­holds in the same part of the in­come dis­tri­bu­tion was lower in 2014 than in 2005 for about two-thirds of house­holds in 25 ad­vanced economies – more than 500 mil­lion peo­ple. From 1993 to 2005, by con­trast, less than 2% of house­holds in these economies had flat or fall­ing in­comes.

In­creases in govern­ment trans­fers and lower tax rates re­duced the ef­fect of stag­nat­ing or fall­ing mar­ket in­comes on dis­pos­able in­comes. Nonethe­less, 20-25% of house­holds faced flat or fall­ing dis­pos­able in­comes from 2005 to 2014, com­pared to less than 2% in the pre­ced­ing 12 years.

A ma­jor cul­prit be­hind this re­ver­sal is the deep re­ces­sion and slow re­cov­ery fol­low­ing the 2008 eco­nomic cri­sis in the ad­vanced economies. From 1993 to 2005, GDP growth con­trib­uted about 18 per­cent­age points to an­nual me­dian house­hold in­come growth, on av­er­age, in the US and Europe; that fig­ure plunged to just four per­cent­age points from 2005 to 2014.

But the post-cri­sis drop in growth is far from the only prob­lem. (If it were, the last decade could be just an anom­aly.) Longer-term fac­tors like weak in­vest­ment, de­cel­er­at­ing labour-force growth, and a sharp slow­down in pro­duc­tiv­ity growth have re­duced in­come growth for the me­dian house­hold in most ad­vanced coun­tries rel­a­tive to the 1993-2005 pe­riod.

De­mo­graphic shifts – in­clud­ing chang­ing fam­ily struc­ture, low fer­til­ity rates, and pop­u­la­tion ag­ing – have led to re­duc­tions both in the over­all size of house­holds and in the num­ber of work­ing-age earn­ers per house­hold. And labour-mar­ket shifts – driven by tech­no­log­i­cal change, the glob­al­i­sa­tion of low- and medium-skill jobs, and the grow­ing preva­lence of part-time, tem­po­rary em­ploy­ment – have caused the wage share of na­tional in­come to de­cline and the dis­tri­bu­tion of that in­come among house­holds to be­come in­creas­ingly un­even. None of these trends is go­ing to be re­versed any­time soon. On the con­trary, some are likely to strengthen.

McKin­sey’s re­search con­firms the role of such long-term fac­tors in un­der­min­ing in­comes for the ma­jor­ity of house­holds. It shows that most house­holds’ real mar­ket in­comes re­mained flat or fell, even though ag­gre­gate growth re­mained pos­i­tive in the 2005-2014 pe­riod.

In the US, in par­tic­u­lar, the abil­ity of la­bor to pro­tect its share of na­tional in­come, and of lower- and mid­dle-in­come house­holds to pro­tect their share of the wage pool, eroded sub­stan­tially. As a re­sult, real growth in me­dian dis­pos­able in­come slowed by nine per­cent­age points from 1993 to 2005, and by an­other seven per­cent­age points from 2005 to 2014.

Swe­den, where me­dian house­holds re­ceived a larger share of the gains from out­put growth in the 2005-2014 pe­riod, has bucked this neg­a­tive trend. In re­sponse to the growth slow­down of the last decade, Swe­den’s govern­ment worked with em­ploy­ers and unions to re­duce work­ing hours and pre­serve jobs. Thanks to these in­ter­ven­tions, mar­ket in­comes fell or were flat for only 20% of house­holds. And gen­er­ous net trans­fers meant that dis­pos­able in­comes in­creased for al­most all house­holds.

To be sure, the US also in­ter­vened af­ter the cri­sis, im­ple­ment­ing a fis­cal stim­u­lus pack­age in 2009 that, along with other trans­fers, raised me­dian dis­pos­able in­come growth by the equiv­a­lent of five per­cent­age points. A four­point de­cline in me­dian mar­ket in­come thus be­came a oneper­cent­age-point gain in me­dian dis­pos­able in­come. But that did not change the fact that, from 2005 to the end of 2013, mar­ket in­comes de­clined for 81% of US house­holds.

Sim­i­larly, re­cent re­search by Berke­ley’s Em­manuel Saez shows that real mar­ket in­come for the bot­tom 99% in the US grew in both 2014 and 2015 at rates not seen since 1999. Nonethe­less, by the end of 2015, real mar­ket in­comes for that group had re­cov­ered only about two-thirds of the losses borne dur­ing the 2007-2009 re­ces­sion. In other words, while dis­pos­able in­come did not fall in ei­ther Swe­den or the US, the US ap­proach was to com­pen­sate for a de­cline in mar­ket in­comes, which Swe­den had man­aged to head off.

The con­se­quences of such fail­ures are far-reach­ing. Stag­nat­ing or fall­ing real in­comes do not just act as a brake on con­sump­tion de­mand and GDP growth; they also fuel so­cial and po­lit­i­cal dis­con­tent, as ci­ti­zens lose con­fi­dence in ex­ist­ing eco­nomic struc­tures.

MGI sur­veys in France, the United King­dom, and the US have found that peo­ple whose in­comes are not grow­ing, and who do not an­tic­i­pate an im­prove­ment, tend to view trade and im­mi­gra­tion much more neg­a­tively than those who are ex­pe­ri­enc­ing or fore­see gains. The Brexit vote in the UK and bi­par­ti­san op­po­si­tion to trade agree­ments in the US are clear signs of this.

Re­cent de­bate about in­come inequal­ity in the US and other de­vel­oped coun­tries has fo­cused on the rapid surge in in­comes for the few. But stag­nat­ing or fall­ing in­comes for the many add a dif­fer­ent di­men­sion to the de­bate – and de­mand dif­fer­ent types of so­lu­tions that em­pha­sise wage growth for the ma­jor­ity of the in­come dis­tri­bu­tion. With most house­holds con­tin­u­ing to face stag­nat­ing or fall­ing in­comes – and with younger gen­er­a­tions thus on track to be poorer than their par­ents – such so­lu­tions are ur­gently needed.

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