By Richard Dobbs, Anu Madgavkar, James Manyika, Jonathan Woetzel, Jacques Bughin, Eric Labaye, and Pranav Kashyap
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.
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
Yet 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 (exhibit). And while government
transfers and lower tax rates mitigated some of the impact, up to a
quarter of all households still saw disposable income stall or fall in
findings provide a new perspective on the growing debate in advanced
economies about income inequality, which until now has largely focused
on income and wealth gains going disproportionately to top earners. Our
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.
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Global Institute’s Anu Madgavkar explains why she is passionate about
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the recession and slow recovery after the 2008 global financial crisis
were a significant contributor to this lack of income advancement, other
long-run factors played a role—and will continue to do so. They include
demographic trends of aging and shrinking household sizes as well as
labor-market shifts such as the falling wage share of GDP.
economic and social impact is potentially corrosive. A survey we
conducted as part of our research found that a significant number of
those whose incomes have not been advancing are losing faith in aspects
of the global economic system. Nearly one-third of those who are not
advancing said they think their children will also advance more slowly
in the future, and they expressed negative opinions about free trade and
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.
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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.
The trend of flat and falling real incomes merits bold measures on the
part of government and business alike.
Two of the report’s authors discuss the global implications of their research. Listen to or read the conversation.
Where incomes are flat or falling