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In Advanced Economies, Two-Thirds of Population Have Seen Incomes Stagnate, Study Shows

Posted by hkarner - 15. Juli 2016

Date: 14-07-2016
Source: The Wall Street Journal

Report underscores damage done by financial crisis to economic advancement for half a billion people

The fallout from the financial bubble and global crisis has had far-reaching impact on income advancement for more than half a billion people.

Across 25 of the world’s advanced economies, about two-thirds of the population—more than half a billion people—earn the same as or less than their peers did a decade ago.

Between 540 million and 580 million people in 2014 had lower or stagnant incomes than similarly situated people in 2005, according to a new study from the McKinsey Global Institute, the research arm of the global consulting firm McKinsey & Co. The finding presents a break from the trend in advanced economies during the post-World War II era when, throughout twists and turns, most families ended up improving on the standard of living of their predecessors.

“Prior to the financial crisis, all but 2% of people in the Western world ended up better off than people like them 10 years ago,” said Richard Dobbs, a McKinsey senior partner and one of the report’s authors. But the world changes when you get a cohort of people who are no longer advancing.”

The study highlights the extent of the fallout from the financial bubble and global crisis it left behind. Incomes a decade ago were boosted by that unsustainable bubble, and the ensuing financial crisis plunged the global economy into a recession from which it has yet to fully recover.

The damage helps explain why many voters are rejecting the established political order, as seen in the U.K.’s vote to exit the European Union, in the embrace of nationalist political parties, or the hunger for candidates removed from the political establishment as seen in the Republican and Democratic presidential races in the U.S.

McKinsey surveyed households in the U.K., France and the U.S. In these countries, 30% to 40% of people said their incomes hadn’t advanced, indicating that even if transfers and taxes have allowed some families to improve statistically, many still yearn for higher incomes. These households expressed sharply negative views about trade and immigration.

Research into income inequality has often focused on the earnings of those at the very top, such as the work by French economist Thomas Piketty, who has highlighted the growing wealth and incomes of the top 1%. Other approaches to measuring inequality include that of the U.S. Census Bureau, which regularly produces data on the share of the population in poverty and a measure of inequality known as the Gini coefficient. The Pew Research Center has highlighted the shrinking number of people earning incomes near the median.

Other researchers, such as Stanford University’s Raj Chetty, have looked at whether people born in the lowest quintile of society rise to higher quintiles —which would require people at higher levels falling down. The McKinsey study sought to distinguish itself by comparing households of today to households at the same place in the income distribution a decade ago.

These aren’t the same households; new households have formed, young workers have entered the workforce, middle-aged workers advanced in their careers and recent retirees left the workforce. But overall, most income percentiles are lower today than a decade ago.

The report highlights that one consequence, if these current trends aren’t reversed, is that “today’s younger generation is at risk of ending up poorer than their parents.”

Across the advanced world, about one-third of households bucked the trend. Those households varied across countries. In the U.K., for instance, the poorest 30% of households advanced. In the Netherlands, the poorest 10% and top 20% advanced. In Italy, households across the income spectrum lost ground.

In the U.S., households from the 80th to 95th percentile gained, underscoring the extent to which America’s upper middle class has thrived. Households from the 60th to 80th percentile were little changed. Households in the bottom 60% lost ground, as did those at the very top. To be sure, these households earn dramatically more than those at the median, but most of those gains occurred before the recession, and hadn’t been fully regained as of 2014 by this measure.

Governments in most advanced countries have cushioned the declines, at least in part. When measured in terms of disposable incomes, after taxes and transfers, disposable incomes were lower for only 20% to 25% of households.

With slow economic growth, and potential disruptions from the aging of the workforce and workplace automation, McKinsey cautioned these trends could continue in the decade ahead, and that most households in advanced economies could experience another a decade of stagnation.

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