The old days of rising incomes have become just a memory for many, new study shows

It used to be that people in rich Western countries could count on being better off than their parents and grandparents, confident that incomes would wobble around a reliably rising trend line.

The experience of the past decade challenges that comfortable assumption, concludes a report that think tank McKinsey published last month, titled "Poorer than their parents? Flat or falling incomes in advanced economies".

It concludes that two-thirds of households in advanced economies were in segments of the income distribution which had market incomes (from wages and capital) which were the same or lower in 2014 than they were in 2005, after adjusting for inflation .

Tax and transfer systems have softened the blow, but even so, disposable incomes were flat or lower for 20 to 25 per cent of income segments.


By contrast, in the prior period from 1993 to 2005, the share of households with flat or falling incomes, market or disposable, was less than 2 per cent.

These dismal conclusions are not based on tracking the same households over time.

Rather, they are based on looking at the income distribution: ranking households by income and dividing them into segments (usually fifths or tenths) and comparing the incomes of the households falling within those groups with those in the same segment a decade earlier.

McKinsey looked at six countries in particular and found that the proportion of households in groups with flat or falling real market incomes between 2005 and 2014 was 97 per cent in Italy, 81 per cent in the United States, 70 per cent in both Britain and the Netherlands, 63 per cent in France and 20 per cent in Sweden.

So it is not just the poor being left behind. The middle ranges of the income distribution have been going nowhere too.

Of course, that period includes a severe recession, followed by an exceptionally weak and slow recovery, interrupted in Europe's case by a double dip recession in 2012 in the wake of the euro crisis.

This may no longer be the case given the massive potential scale and scope of labour displacement due to automation.


But weak gross domestic product growth is not the only, or even the most important, factor behind income stagnation.

Demographic changes have also had an effect, particularly the ageing of the population and a trend towards smaller households. A decline in the average number of wage-earners per household tends to retard household income growth.

Then there are structural changes in the labour market.

One is a decline in the share of national income flowing to labour rather than capital.

Another is the effect on low- and mid-skilled workers of increased global competition for the kinds of work they do.

Add to that the automation of more and more manufacturing and clerical tasks. McKinsey estimates that activities which account for 30 per cent of the work time of 60 per cent of US employees could be automated with available technologies.

In previous waves of technological advance, more jobs were created than destroyed, it says, and any tradeoff between productivity growth and employment growth was temporary. "This may no longer be the case given the massive potential scale and scope of labour displacement due to automation."

As households and governments contemplate their debt levels, they gulp and tighten their belts, reinforcing the stagnation.


Compounding all this has been growth in temporary and part-time work, particularly in lower-skilled occupations. In New Zealand, for example, one in every five part-time employees would like to, and could, work longer hours, according to the latest household labour force survey.

Moderating the impact of these trends is the effect of tax and transfer payments.
But not for everyone. In the United Kingdom the impact of changes in transfers and taxes between 2005 and 2014 was to boost the disposable incomes of the middle and higher income quintiles by between 4 and 6 per cent, but cut the bottom quintile's income by 7 per cent.

That may help explain some of that spectacular own goal - the Brexit vote.

A survey of sentiment McKinsey commissioned in the US, Britain and France provided an indication, it says, of the potentially corrosive social and economic consequences of flat or falling incomes. Between 30 and 40 per cent of respondents said their incomes were not advancing and did not expect the situation to improve for the next generation. They were the most likely to have negative views on trade and immigration.

The McKinsey report lends weight to the theory that advanced economies are stuck in a prolonged period of secular stagnation - chronically weak economic growth, masked only temporarily and unsustainably by very loose monetary policy and rapid debt accumulation.

As households and governments contemplate their debt levels, they gulp and tighten their belts, reinforcing the stagnation.

But governments and businesses are not helpless in the face of such trends. There are generic policies to boost productivity and economic growth: good competition policy, for example, and investment in infrastructure.

Beyond that we need policies targeted at those especially at risk, like easing the transition from education to employment. Having 11 per cent of the population aged between 15 and 24 not in employment, education or training - that is 71,000 young people - is a waste the country cannot afford.

Changes in the incidence, rather than the level, of the tax burden could help too.

How about trading off a capital gains tax for a lowering of the GST rate as the latter falls more heavily on low- and middle-income households?

Finally, chief executives and other business leaders might like to contemplate the simple notion that one man's employee is another man's customer. If everyone is intent on screwing down wages, the benefit to the cost line will be offset by a hit to the revenue line.

By contrast, Air New Zealand's presentation to the Labour Party's Future of Work seminar in Wellington last Friday highlighted the benefits of a collaborative approach: a 42 per cent lift in net profit after tax, higher dividends and a $2500 bonus for employees.