Why many Americans feel worse off

By James Manyika and Anu Madgavkar

U.S. household incomes remain flat, leaving many Americans worried about their economic future, write James Manyika and Anu Madgavkar in Forbes

This election season is unfolding against a backdrop of economic anxiety. Many Americans are not just worse off financially. They feel worried about their children’s prospects—a sharp departure after many decades in which the country took it as an article of faith than every generation would enjoy higher living standards than their parents.

The numbers back up their sense that something has been lost. The McKinsey Global Institute’s new research provides a detailed picture of what has been happening to US household incomes, and it shows that dramatic changes in the past decade.

From 1993 to 2005, real income from wages and capital rose for almost all US households, just as it has most of the past four decades with some limited exceptions. But between 2005 and 2014, this steady progress ground to a halt. Real incomes from wages and capital flattened or fell for just over 80 percent of US households.

Middle-income households were the most affected, and young and less educated people were especially vulnerable. In 2012, wages were down by 6 to 15 percent from their 2002 levels for American workers under age 30. Across all age groups, medium- and low-skill workers did worse than those with a college education. Single mothers were hit especially hard. In the decade from 2003 to 2013, their real household incomes fell nearly one percentage point faster than those of all other households.

Looking solely at the statistics on disposable income—in other words, what people take home after taxes and transfers—you wouldn’t necessarily spot this trend. The government’s post-2008 stimulus measures transferred more than $350 billion to households to get them through the downturn; this came in the form of tax relief and increased and extended unemployment benefits. The result was that the decline in “market” incomes for more than four-fifths of households turned into gains in disposable incomes for almost everyone.

Our study looked at five other countries in depth—France, Italy, the Netherlands, Sweden, and the United Kingdom—and found that none of them were as effective as the United States in using redistributive government policies to create some measure of income advancement of all segments of households. Policy can make a significant difference, although at a time when government debt has risen sharply, policies built on broad redistribution may not be sustainable.

But to many, this effect did not feel much like progress. In response to a survey we conducted, almost 40 percent of US respondents told us that they felt their incomes were stalled. Furthermore, almost two in five of this group didn’t expect to see gains in the next five years, and one in four thought their children would also advance more slowly in the future. This segment is losing hope of achieving a better future—and notably, they are also much more negative than other respondents about free trade and immigration.

What is behind this trend? The main culprit is still the Great Recession and the slow recovery that followed it. Between 1993 and 2005, GDP and employment growth boosted incomes in the US by 19 percentage points, but from 2005 to 2014, that contribution dropped to just 4 percentage points.

Other factors played a role, too, and will continue to do so even if growth accelerates. The share of national income that goes to wages in the US has dropped by 8 percent since 1970, despite rising productivity. This drop has multiple causes, including the growth of corporate profits as a share of national income, rising capital returns to technology investments, lower returns to labor from increased trade and automation, and rising rent incomes from home ownership. In the future changing demand for low and middle-skill workers and increasing technology adoption could continue to weigh on this so-called wage share.

While policy can—and has—made a difference, at least at the level of disposable income, much more could be done. Reviving economic growth and above all rekindling productivity growth are the first orders of business. Higher productivity should feed the creation of more jobs with better pay.

Economists and policy makers across advanced economies are currently debating the pros and cons of other measures, including minimum wage hikes and even the introduction of a universal basic income paid to all. These are often controversial and will need to be tested and carefully evaluated. In fact, Swiss voters recently rejected the idea of a universal basic income. But the experience in some countries suggests that labor-market measures can be effective. For example, in Sweden, where the government intervened to preserve jobs during the global downturn, market incomes fell or were flat for only 20 percent of households, while disposable income grew for almost everyone.

But government should not be the only actor; there is also an important role here for business. Boosting economic growth and productivity can set the stage for income growth – but the gains need to be more broadly shared. By looking at longer-term outcomes in addition to quarterly earnings, CEOs may recognize that paying better wages and introducing profit sharing and non-cash benefits can raise productivity and loyalty—and when employees have more disposable income, it increases demand across the economy. Companies can also benefit by taking steps to keep women and older employees in the workforce, and work with government and education providers to create more effective programs. Part of the solution also lies in embracing growth-enhancing globalization but at the same time recognizing that the workers and communities affected by exposure to international competition need more support in navigating industry shifts.

One thing is clear: Avoiding action is not an option. Quite apart from the social or political impact, flat or falling incomes have a corrosive impact on the economy, raising the burden on government for more social spending. It’s time for the United States to make this issue as a priority—and for businesses to step up too.

This article originally ran in Forbes.

About the author(s)

Dr. Manyika is a director of the McKinsey Global Institute and a Senior Partner at McKinsey, Ms. Anu Madgavkar is an MGI partner.