While the issue of economic inequality has become a defining political issue, decried by everyone from Barack Obama to the Bank of England, much of the focus has been on tax avoidance and bulging incomes for high earners. Much less discussed, however, has been the stagnation of incomes for many earners in the advanced economies of the world.
According to a new study released by the McKinsey Global Institute, real incomes in advanced economies have stagnated over the past decade. Between 2005 and 2014, the report claims, most households across the 25 advanced economies that were measured failed to see any substantial wage growth.
This stagnation of incomes is likely to further put fiscal pressure on already indebted advanced economies
The study found that within these advanced economies, 65 to 70 percent of households “were in segments of the income distribution whose real market incomes – their wages and income from capital – were at or had fallen in 2014 compared with 2005”. Between 1993 and 2005, less than two percent of households experienced the same stagnation of income.
Government subsidies and tax cuts cushioned this stagnation for many households, meaning that only 20 to 25 percent saw their disposable income flat line. Most notably, tax cuts and government welfare spending in the US reversed market income declines into an increase of disposable income for nearly all households. Meanwhile, government policy in Sweden – such as labour market intervention – resulted in incomes falling or stagnating for just 20 percent of the population, while disposable income increased for nearly all.
This stagnation of incomes – and the need to cushion it with tax cuts and state spending – is likely to further put fiscal pressure on already indebted advanced economies. Continued stagnation for disposable incomes is also likely to dampen demand growth, prolonging sluggish economic growth in advanced economies.
