This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 25 - 31, 2016.

The younger generation in advanced economies are at risk of ending up poorer than their parents because of flat or falling incomes, according to McKinsey Global Institute, the business and economics research arm of global management consulting firm McKinsey & Co.

Its report, Poorer than their parents? Flat or falling incomes in advanced economies, says 65% to 70% of income segments in advanced economies experienced flat or falling market incomes between 2005 and 2014 compared with only 2% of income segments between 1993 and 2005.

MGI researchers also found that disposable income (income after tax and transfers) remained flat or decreased in 20% to 25% of households between 2005 and 2014, compared with less than 2% between 1993 and 2005 — although reduced taxes and transfers helped minimise the decrease in disposable income.

“In general, disposable income is an essential driver of economic growth; final household consumption supplies about two-thirds of total demand in the US and 45% to 65% of demand across Europe. Low and middle-income households spend more of their income than wealthy ones, and when their income stagnates or falls, this can affect aggregate demand and economic growth,” says Anu Madgavkar (picture), Asia expert and partner at MGI, in an email response to Personal Wealth.

This trend of flat or falling market incomes was due to a lack of income advancement, contributed by the falling or tepid gross domestic product (GDP) growth, a change in demographics (with shrinking household size and ageing population), lower capital income and labour market shifts (lower share of GDP owing to wages and weak demand for low and medium-skill labour) in the years after the 2008 financial crisis. 

While the researchers did not look at developing economies, they did study a few of the largest emerging economies, such as India, Brazil and Russia, and found that incomes have risen over the last 14 years.

“From 2002 to 2013, all income groups advanced. For instance, in India, household consumption grew for all income deciles. Emerging economies will need to continue achieving productivity growth and broad-based job creation, as well as pro-poor reforms, to sustain this,” says the report.

If this continues, it could negatively affect developing economies such as Malaysia in the future, Madgavkar tells Personal Wealth. “While we did not look at the impact on developing economies in our report, if flat or falling incomes lead to lower GDP growth in advanced economies, this could negatively affect their developing economy trading partners.”

The report also says the recession and weak recovery in advanced countries have led to persistently high levels of unemployment among youth (below 30 years old).

“More broadly, the underlying drivers are forces such as automation and shift in demand towards high-skill labour, which has affected the income growth of low and middle-income groups. While the recession and recovery touched most households up and down the income distribution, the top quintiles have fared better than lower-income groups when it comes to holding on to their share of the total wage pool, except in Italy and Sweden,” says Madgavkar. 

“Wage growth has been more limited in low-skill occupations such as construction, non-finance services and low-tech manufacturing than in high-skill industries such as finance and high and medium-tech manufacturing,” she adds.

Due to the recession, there were fewer capital income and labour market shifts, says the report. This meant growing unemployment numbers and a lower share of GDP flowing into wages. 

MGI says productivity and workforce have been the two key drivers of global growth over the last 50 years. As there is a slowdown in the growth of the workforce, global GDP growth will have to rely more on the strength of productivity growth in the next 50 years.

The demographic segments were based on three age groups (below 30, between 30 and 45, and above 45) and three levels of education (low, medium and high — without a high school diploma, with a high school diploma and with a university degree). The researchers found that workers with a low level of education were the hardest hit by unemployment. 

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