The Death of the Middle Class Is Worse Than You Think

Jul 13, 2016

From Brexit to Donald Trump, if there's anything that current events tell us, it's that the man on the street is angry and wants change.

A new report from the McKinsey Global Institute, with the chilling title "Poorer than their Parents: Flat or Falling Incomes in Advanced Economies," shows just why this is the case. According to the paper, the trend in stagnating or declining incomes for middle class workers is not just confined to the United States, but is a global phenomenon hurting workers across the wealthy world.

The report found that as much as 70% of the households in 25 advanced economies saw their earnings drop in the past decade. The study tracked income brackets, not individual households, from 2005 to 2014. That compares to just 2% of households that saw declining incomes in the previous 12 years.

The authors estimate that this means that "while fewer than ten million people were affected [by flat or falling incomes] in the 1993-2005 period, that figure exploded to between 540 million and 580 million people in 2005-2014."

To put it bluntly: A huge swath of the world's population, one that had been taught to expect their material wealth to grow through their lifetimes and across generations, has learned that this promise was a lie. No wonder voters in the rich world are being seduced by radical politics and specious solutions to their economic problems.

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.

In addition, government redistribution is doing a lot to blunt the effects of this trend on those who are suffering from it. When looking at the number of household income after taxes and transfers of income (like social security payments) are taken into account, only about 20 to 25% of households in the countries studied saw their incomes stagnant or falling. And there was much variance between countries in terms of how many people were impacted by the trend. According to the report:

At one extreme is Italy, which experienced a severe economic contraction in the recession after the 2008 financial crisis and has had a very weak recovery since. There, real market incomes were flat or falling for virtually the entire population. At the other extreme is Sweden, where only 20 percent of the population had flat or falling market incomes. In each of the four other focus countries—France, the Netherlands, the United Kingdom, and the United States—the proportion of segments whose market incomes did not advance was in the 60 to 80 percent range.

The authors write that the reason for this variation "reflect differences in policy approaches; labor institutions such as the strength of unions and their role, or services for the unemployed; and a widely varying national economic, fiscal, and monetary policy responses." For instance, one Swedish trait the authors point to—which they say helped protect workers in the aftermath of the recession—is a strong labor movement. They argue that the fact that 68% of Swedish workers belong to a union helped to keep wages rising. Furthermore, a labor sharing scheme, whereby the Swedish government worked with companies and unions to prevent layoffs by reducing hours worked rather firing workers helped protect that country from the scourge of long-term unemployment that has depressed worker's earning potential in the United States.

But whatever your policy prescription for solving the problem of wage stagnation, this report makes clear that is a new and growing problem in the wealthy world.

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