July 18, 2016

Covenant is broken for the middle class as most will be worse off than parents

The real incomes of about two-thirds of households in 25 advanced economies were flat or fell between 2005 and 2014. Without action, this phenomenon could have corrosive economic and social consequences.

Most people growing up in advanced economies since World War II have been able to assume they will be better off than their parents.

For much of the time, that assumption has proved correct: except for a brief hiatus in the 1970s, buoyant global economic and employment growth over the past 70 years saw all households experience rising incomes, both before and after taxes and transfers. As recently as between 1993 and 2005, all but 2 percent of households in 25 advanced economies saw real incomes rise.

This overwhelmingly positive income trend has ended. A new McKinsey Global Institute report, Poorer than their parents? Flat or falling incomes in advanced economies, finds that between 2005 and 2014, real incomes in those same advanced economies were flat or fell for 65 to 70 percent of households, or more than 540 million people



The analysis details the sharp increase in the proportion of households in income groups that are simply not advancing—a phenomenon affecting people across the income distribution. And the hardest hit are young, less-educated workers, raising the spectre of a generation growing up poorer than their parents.

If the low economic growth of the past decade continues, the proportion of households in income segments with flat or falling incomes could rise as high as 70 to 80 percent over the next decade. Even if economic growth accelerates, the issue will not go away: the proportion of households affected would decrease, to between about 10 and 20 percent—but that share could double if the growth is accompanied by a rapid uptake of workplace automation.

Broad Policy intervention to keep middle class treading water with slight increases

The encouraging news is that it is possible to reduce the number of people not advancing. Labor-market practices can make a difference, as can government taxes and transfers—although the latter may not be sustainable at a time when many governments have high debt levels. For example, in Sweden, where the government intervened to preserve jobs during the global downturn, market incomes fell or were flat for only 20 percent of households, while disposable income advanced for almost everyone. In the United States, lower tax rates and higher transfers turned a decline in market incomes for four-fifths of income segments into an increase in disposable income for nearly all households. Efforts such as these—along with additional measures such as encouraging business leaders to adopt long-term thinking—can make a real difference



Instead of slow and steady declines, you could see big runups and big drops in income and with more time down than up overall

There are a few caveats. First, McKinsey researchers didn’t conduct a longitudinal study that tracks the individual fortunes of specific people over the course of many years. So while we know that the incomes of population segments (for instance a male 40 year-old college grad) are stagnant or falling, individuals within those segments may have much different fortunes. A 2015 study of the American middle class by by sociologists Thomas Hirschl of Cornell University and Mark Rank of Washington University show what a difference this can make. They found that because of large variances in income over a lifetime, individual earners spend part of their lives as top earners and parts of their lives on the bottom heap. Therefore what can seem like a slow and steady decline of economic fortunes for the middle class might not feel that way for many members of that class.

Global Middle class is what developed world considers poor

Many Americans who are poor by the U.S. standard would be middle income by the global standard, living on more than $10 per day. As it turns out, the $10 threshold is close to the median daily per capita income of U.S. households (officially) living in poverty: $11.45 in 2011, according to Pew Research estimates. In other words, more than half of Americans who are poor by U.S. government standards would be middle income when compared with the rest of the world. A fair share, however, would be either low income or poor, globally speaking

Leadership failure

Today’s business leaders have failed in the simplest, starkest, hardest terms. The middle class, which is the bellwether of prosperity, its truest measure, and the great creation of modernity is vanishing under their watch. Even the so-called “rising global middle classes” in developing countries aren’t replacing them, really. (They don’t enjoy the same rights, protections, security, and quality of life as the dwindling middle classes in many wealthier nations. They have been named “middle classes” by pundits—but that is like calling both a supertanker and a canoe a boat.)

There will come a point when abandoned people are willing to see the whole playing field burn down, so that it can be level again.


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