trump inequality

According to research from McKinsey, real income growth among families across 25 advanced countries between 2005 and 2014 was either flat or negative for 65% to 70% of households.

Changes to the tax system and transfers mitigated against the effect, but even after taking this into account, up to one-quarter of all households saw disposable income fall during the period.

The worst afflicted country is Italy, where a staggering 97% of all households suffered either flat or falling disposable income between 2005 and 2014. In the UK, the number was 70%, the same as Holland, and slightly higher than in France (63%).

In Sweden, a mere 20% of households saw flat or falling growth in disposable income.

McKinsey found that “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 immigration.”

So that’s some pretty worrying findings.

It is worrying that so many people fear their children will be worse off than them.

It is worrying that so many blame free trade and immigration.

Yet studies show that free trade boosts wealth overall and that immigration usually has a positive effect on an economy.

If you want to look for an explanation for the rise of Trump or the UK Brexit vote, then stop. The answer is there, in the above findings.

McKinsey said that in the US “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.”

But Sweden is surely the poster economy. McKinsey said that in this country “where the government intervened to preserve jobs during the global downturn, market incomes fell or were flat for only 20% of households, while disposable income advanced for almost everyone.”

It also said: “In Sweden, where 68% of workers are union members, the median household received a greater share of output that went to wages—and received more of the gains from output growth than households in Sweden’s top and bottom income deciles in the 2005–14 period. This reflects Swedish labour policies such as contracts that protect wage rates and hours worked. After the global financial crisis, the Swedish government worked with unions to forge agreements for temporary reductions in work hours, which preserved jobs and helped private-sector employers withstand the downturn. “

Here is a curiosity. Sweden has also seen government debt plummet, but household debt shoot-up in recent years. For private sector debt, Sweden is one of the most indebted countries in the world, but public debt is modest. Between 1997 and today household debt in Sweden rose from 90% of GDP to 190%. House prices have risen rapidly, too. Public debt is now worth just 44% of GDP.

It’s a curiosity because the famous economist, and outgoing governor of India’s central bank, Raghuram Rajan, has suggested that allowing rising debt levels describes the method governments found to placate disgruntled workers, who were not seeing rising wages. To sum up in a sentence a very involved theory: with interest rates so low, households can borrow, and thus it matters less that wage growth is slow; the theory is characterised by the saying “let them eat credit.” It’s a good theory and makes a lot of sense, but is rather contradicted by the Swedish example.

And turning to the UK, the Rowntree Foundation has found that poverty costs the UK £78 billion a year. Major costs, listed in order of size include: the costs of treating poverty-related health conditions, school-related initiatives such as free meals, police and criminal justice costs, children’s services, social care and housing.

Returning to McKinsey, Richard Dobbs from the consultancy said: “Businesses can play a very important role in helping to address this”:

First, businesses can play an important role in delivering growth through higher productivity.

Second, businesses can play a role in helping people retrain when jobs disappear. He cites the example of British Gas “that actually now runs apprenticeship programmes for people up to the age of 50.” He said: “This reflects the fact that people’s jobs may disappear midcareer and they need to retrain.”

“Third, businesses can also play a role in helping schools and pre-early–education establishments get people trained with the right capabilities. They can help schools set the agenda for education and encourage more students to be doing business-related subjects at school rather than stuff that’s not directly business related.”

Photo credit Photo: Mike Licht