Several factors have come together to fuel income inequality in the United States. While many market observers have examined this rising inequality, the McKinsey Global Institute took a different approach, taking a closer look at people whose income either stayed flat or declined, compared to individuals from the past who had similar incomes or demographic profiles. Between 2005 and 2014, two-thirds of U.S. households saw their real market incomes either stall or drop.
The report paid particular attention to this 10-year period, because it contrasted with the income growth that households in advanced economies have generally enjoyed since World War II.
While the report found that the financial crisis of 2007-2009 and its subsequent slow recovery played a key role in this deterioration, this event was worsened by shifts in labor market conditions and demographic trends. The falling share of gross domestic product (GDP) going to wages, the rise of workplace automation and shifting demographics all played their part.
Financial Crisis and Recovery
Following the financial crisis, the global economy suffered one of the most severe recessions since the Great Depression. Once the nations of the world emerged from this downturn, many experienced recoveries that were rather sluggish.
The United States, for example, experienced GDP growth that averaged only 2.2% between the end of the recession in June 2009 and the end of 2014. This represents the weakest expansion of the post-World War II era. The figure of 2.2% was more than 0.5% below the rate experienced during the second-weakest recovery of the last 70 years.
In addition to this modest growth, inflation-adjusted wages have increased very little during the recovery. Private payrolls’ average hourly earnings have increased an average of roughly 2.1% a year, but after adjusting for inflation, real wages have barely grown at all, according to the Center on Budget and Policy Priorities.
Falling Wage Share
The wage share, the proportion of national income that is paid in wages, experienced a sharp change following the financial crisis. Before this event, an average of 18% of U.S. GDP growth went to median household income growth, according to figures provided by the report.
This figure dropped to 4% in the seven years following the recession, additional data included in the report showed. In addition to suffering this sharp decline, the portion of national income going to wages was undermined by changes in the labor market and demographic trends.
While the incomes of most segments of the population either stalled or declined between 2002 and 2012, some demographic groups experienced a greater impact, the McKinsey report found. Less-educated workers, younger ones in particular, took a larger hit than those in other demographics. The report also noted that women, and single mothers in particular, were more likely to show up in lower income deciles.
Labor Market Shifts
The labor market experienced some structural changes between 2005 and 2014. One major variable affecting this market was automation. The rising use of personal computers has eliminated many clerical positions, and robots have taken the place of many machine operators in factories. Past that, "smart" machines have made it possible to automate many tasks that were previously considered beyond automation.
McKinsey’s report estimated that with technologies that are available or have been announced, companies could potentially automate tasks that account for 30% of the hours spent by 60% of U.S. employees.
Several variables helped income inequality rise between 2005 and 2014, a development that took place as two-thirds of American households saw their income either stay flat or decline. In addition to a financial crisis and lackluster recovery, labor market shifts, demographic trends and falling wage share all helped fuel this growing disparity.