McKinsey: 2/3 of Western Economies Not Seeing Income Gains

McKinsey & Company was one of the biggest advocates of globalization, but the company just published a report warning that with incomes for two-thirds of households in 25 advanced economies flat or down between 2005 and 2014, advanced countries are about to suffer “corrosive economic and social consequences.”

As the premiere management consultants, McKinsey & Company has been in the forefront of a business globalization strategy that led to numerous U.S. trade deals over the last 20 years. Despite the global financial crisis, in a 2010 study McKinsey claimed: “The core drivers of globalization are alive and well.” Four years later, McKinsey wrote: “To be unconnected is to fall behind.”

But in jarring mea culpa, a McKinsey report titled “Poorer than their Parents? Flat or Falling Incomes in Advanced Economies” research report found that despite 60 years of advanced-nation households experiencing, on average, rising incomes, both before and after taxes and transfers, from 1945 to 2005, the “overwhelmingly positive income trend” ended in 2005.

Since then, 65 to 70 percent of households saw flat to lower real (after-inflation) incomes. While government transfers and lower tax rates may have mitigated some of the impacts, McKinsey found that the incomes of 540 million people failed to grow in the decade.

The report reveals a direct link between income success, and views regarding trade:

• For individuals whose income was advancing or neutral, only 19 percent blamed immigrants hurting the cohesion of society; 29 percent believe the influx of foreign goods can cause domestic job losses; and 43 percent believe cheaper foreign labor created unfair competition to domestic companies.
• For individuals not advancing, 30 percent blamed immigrants hurting the cohesion of society; 48 percent blame an influx of foreign goods causing domestic job losses; and 63 percent blame cheaper foreign labor creating unfair competition to domestic companies.

Richard Dobbs, the co-leader of the McKinsey research team, told Bloomberg compared the buildup of resentment over globalization to a dangerous natural gas leak in a row of houses. He sees the Brexit as just the first explosion, but warned the results of his study saw similar attitudes across many nations.

Dobbs believes that the advanced economies are facing the specter of a generation growing up poorer than their parents, for the first time since the Great Depression. This is breeding resentment across a majority of individuals.