One thing we’ve learned over the past week is that people are worried about money. It seems that Trump’s appeal lies largely with the “white working class”, people who are worried about their financial situation and feel that the government aren’t there to protect them. However, this conflicts with the prevailing idea that we’re all, generally speaking, getting richer, and that each new generation is wealthier than their parents.
While, with the exception of the period of stagflation in the 1970s, this has been true since the end of World War 2, a study this year, entitled “Poorer than their parents? Flat or falling incomes in advanced economies”, by the McKinsey Global Institute reports that the next generation are indeed at risk of growing up poorer than their parents.
The increase in flat or falling incomes
From 1945 onwards, and with the exception of the aforementioned 1970s, strong global economic and employment growth led to the real incomes of people in advanced economies rising. In fact, between 1993 and 2005, 98% of households saw real incomes rise. However, over the past decade that rising income trend has reversed, and now the majority of households have flat or falling incomes compared to the past. From 2005 to 2014, over two-thirds of households in 25 advanced economies, over 540m people, saw their real income from wages and capital decline.
While government transfers and lower tax rates have reduced the effect on disposable income, that is, the income people are actually able to spend, a quarter of households saw their disposable income decline over the same period, compared to less than 2% from 1993-2005. This phenomenon is especially prevalent in countries such as France, the UK, and the Netherlands, all of which have seen the rise of far-right political parties quite recently.
This research provides a new and interesting take on the global debate around income inequality. Most of the focus has been on the majority of income and wealth gains going to top earners, with falling incomes receiving much less attention, but this study has shed some much needed new light on the latter. Falling incomes affects the entire income distribution, and it acts as a brake on GDP growth, worsening the problem. The hardest hit are single mothers and young, less educated workers, people already suffering from low incomes, who now have even less to live on.
“If low economic growth continues, then as many as 70-80% of households could experience flat or falling incomes.”
While the recession and slow recovery that followed the 2008 financial crisis have undoubtedly played a role in this lack of income advancement, these are not the only factors. Demographic trends of ageing and shrinking house sizes, as well as labour-market shifts such as the falling wage share of GDP, driven by changing demand for low and medium skilled workers, increasing automation, migration, and trade, have all played a role, and will continue to do so.
A separate survey, carried out in conjunction with this study, shows that, perhaps unsurprisingly, this phenomenon fuels social and political disgruntlement. The survey, conducted in France, the UK, and the US, shows that people whose incomes are not advancing and who think their children’s will also advance more slowly, tend to be dismissive of free trade and immigration. An implication of this, is that people who voted for Trump and Brexit, did so not only because they saw a wealthy elite getting much richer than them, or because their income wasn’t growing fast enough, but because their incomes, and their children’s prospects, were steadily declining.
These long-term factors mean that this decline in income is unlikely to reverse itself anytime soon, even if GDP growth accelerates. If low economic growth continues, then as many as 70-80% of households could experience flat or falling incomes. Even if economic growth does accelerate, 10-20% of households would still be affected; although that share could double if the growth is accompanied by increased automation – a likely prospect given recent technological advances.
Reversing the trend
“In the United States, lower tax rates and higher government transfers following the financial crisis, meant that although 80% of households experienced a decline in market incomes, over 98% of them experienced an increase in disposable income.”
There are, however, a number of government policies that can help to reverse this decline. For example, in Sweden, the government intervened to preserve jobs during the global recession. This meant that market incomes fell or were flat for only 20 percent of households. In the United States, lower tax rates and higher government transfers following the financial crisis, meant that although 80% of households experienced a decline in market incomes, over 98% of them experienced an increase in disposable income.
The study recommends a number of other suggestions to improve the situation. First off, they recommend that international organisations, such as the OECD and International Labour Organisation, derive more effective measurements of income inequality, and in particular, the issue of flat or falling incomes. Many organisations are trying to move away from just using the standard measurements of unemployment and GDP growth, and properly tracking falling incomes allows us to better understand the policies that can help improve things.
They also highlight the importance of boosting productivity, raising growth in the process. This doesn’t just come from new and innovative areas such as advances in technology, but also from increased and competition and deregulation, and targeting infrastructure and other investment that creates new jobs in the short run and shores up economic growth in the long term. As well as this, it’s important to target the households most at risk in the process. Skills programs that ease the transition from education to employment, and policies which increase labour participation among women, such as increased childcare, also help.
With the wide range of people affected, and rising far-right sentiment across the developed world, it’s important that governments prioritise the issue of income inequality, and especially the issue of flat or falling incomes.