25

The Great Income Stagnation

BERKELEY – Nowadays, the inequality debate often focuses on the disproportionate accumulation of income and wealth by a very small share of households in the United States and other advanced economies. Less noticed – but just as corrosive – is the trend of falling or stagnating incomes for the majority of households.

For much of the post-World War II period, until the 2000s, strong GDP and employment growth in the advanced economies meant that almost all households experienced rising incomes, both before and after taxes and transfers. As a result, generation after generation grew up expecting to be better off than their parents. But, according to new research from the McKinsey Global Institute, that expectation may no longer be warranted.

During the last decade, income growth came to an abrupt halt for most households in the developed countries, with those headed by single women or comprising young, less educated workers among the hardest hit. Real income from wages and capital for households in the same part of the income distribution was lower in 2014 than in 2005 for about two-thirds of households in 25 advanced economies – more than 500 million people. From 1993 to 2005, by contrast, less than 2% of households in these economies had flat or falling incomes.

Increases in government transfers and lower tax rates reduced the effect of stagnating or falling market incomes on disposable incomes. Nonetheless, 20-25% of households faced flat or falling disposable incomes from 2005 to 2014, compared to less than 2% in the preceding 12 years.