Income inequality: Why so many households are not advancing

Desdemona Despair

2 August 2016 (McKinsey) – While it’s broadly assumed that children will grow up to be better off than their parents, the reality is that a new generation of young people in advanced economies risks ending up poorer. In this episode of the McKinsey Podcast, McKinsey senior partner Richard Dobbs and McKinsey Global Institute (MGI) partner Anu Madgavkar talk with Peter Gumbel about the increase in the number of households that experienced flat or falling incomes in the past decade—and the implications for future growth and economic advancement.

Podcast transcript

Peter Gumbel: Hello, I’m Peter Gumbel, senior editor, based in Paris, at the McKinsey Global Institute. Today I’m delighted to be speaking with Richard Dobbs, a McKinsey senior partner in London, and Anu Madgavkar, an MGI partner based in Mumbai. Richard and Anu have been spearheading new research on income inequality for the McKinsey Global Institute, and they’re the coauthors of a new report called Poorer than their parents? Flat or falling incomes in advanced economies. One of its striking conclusions is that two-thirds of households in 25 advanced economies have been affected by this flat-or-falling-income phenomenon. They’re here today to explain what that is, why it’s happening, and what it means. Richard and Anu, thank you for being with me today.

Richard Dobbs: Hello.

Anu Madgavkar: Hi, happy to be here.

Peter Gumbel: Great. Let me start with you, Anu. What exactly do we mean by flat or falling incomes?

Anu Madgavkar: Our research look at groups of households organized by income segments. We’re then able to track what these typical groups have experienced in terms of income growth over the last decade and the period prior to that. When these typical households, in each income segment, see no advancement in terms of their income, we’re able to say that there is a general lack of economic progress.

By this metric, we see a very dramatic increase in the phenomenon of flat or falling incomes. The proportion of households that have been affected by this trend has virtually exploded, from less than 2 percent to as much as 65 percent to 70 percent of the population, in the past decade—from about 2005 to 2014.

Peter Gumbel: That’s a tremendous increase. Have others already looked at this, or is this research quite unique in terms of the bigger debate out there about income inequality?

Anu Madgavkar: There has been a lot of very influential and important work on income inequality. But much of it, including the work by Thomas Piketty and others, has really focused on the very top of the income distribution—perhaps the top 5 percent of households or the richest 1 percent, even.

We don’t focus just on that segment. We look across the income distribution at multiple segments to understand how inequality has manifested itself in terms of income trends and income growth for all segments, and not just the richest. [more]

Income inequality: Why so many households are not advancing