While the wealth gap has narrowed globally, inequality within advanced economies has increased since the 1980s.

My own take: G-7 is no more a convenient focus group for worldwide studies…

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Origen: G7 Inequality: A persisting challenge and its implications | McKinsey

Highlights of the abridged version of the discussion paper.

We highlight different dimensions of inequality, such as inequality of wealth, of income, of consumption, and of opportunity, with a particular but not exclusive focus on the G-7 countries—Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States—which in many ways are at the epicenter of the challenges around inequality.

Higher-income countries’ share of global wealth fell from 80 percent in 2000 to 71 percent in 2014, while the wealth share of middle-income countries such as Indonesia and Mexico rose from 14 percent to 22 percent. … the consumption expenditure gap between G-7 and low-spending OECD countries has halved since 2000.

Inequality within many advanced countries is moving in the opposite direction from the global trend of declining inequality between countries. In G-7 economies and across many (but not all) advanced economies, wealth and income inequality in general has been rising since the 1980s.
It is important to provide nuance and context to this blanket statement. Within inequality, there is a hierarchy of sorts: the distribution of wealth among the population is substantially more unequal than the distribution of income, which in turn is more unequal than the distribution of consumption, based on consumption expenditure.

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Some economists and social scientists argue that inequalities of wealth, income, and consumption can harm economic growth in the long run by hindering educational opportunities, human capital formation, and intergenerational mobility. Growing inequality is seen by some economists as a signal of excessive monopoly power, rent seeking, or activities with negative externalities and adverse effects on economic performance. Moreover, when incomes go mostly to those at the top, some suggest there is little left to motivate people further down the earnings ladder.

Others argue that these debates would be better served by a focus on economic growth and increasing the absolute size of the economy, rather than how the growth is shared. In this view, inequality is a result and enabler of economic progress, driving investment and the willingness to take risks. Accordingly, certain social transfers aimed at redistributing economic gains are viewed as dampening incentives or distortionary, where the role of the state could be rolled back.

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Average real wages have grown in five of the G-7 countries since the financial crisis in 2008, but in Italy and the United Kingdom they have fallen. Real net income has declined for 25 percent of individuals in six of the G-7 economies (excluding Japan) since 2005. For 60 percent of the population, disposable income has risen faster for people in the next-richest income decile than it has for them.

These effects are related to a decline in middle-wage jobs across advanced economies over the past three decades. In the United States, for example, the share of adults living in middle-income households declined from 61 percent in 1971 to just 50 percent in 2015. While about two-thirds of this shift has been upwards, to upper-middle and higher-income households, one-third of those have shifted down to lower-middle and the lowest income households, creating an hourglass-like effect. Our research on skill shifts and automation suggests competition for high-skill workers will likely increase, while displacement may be concentrated mainly on low-skill workers, continuing a trend that has exacerbated income inequality and reduced middle-wage jobs.

On the employment front, average employment in the G-7 has remained broadly stable since the 1980s and employment of the working-age population has risen. However, the employment rate for women has grown sharply, by 16 percentage points, even as the male employment rate has declined by four points. The male employment rate remains higher than the female rate, at 76 to 65 percent, but the gap has narrowed markedly.

Several indicators point to a growing fragility and precarity in the economy. Relative poverty rates before taxes on average in the G-7 have risen by seven percentage points from 23 percent of the population in 1985 to almost 30 percent in 2016. Transfers and tax reduce that proportion but do not fully compensate; on average, almost one in seven people living in the most advanced economies remains in relative poverty after taxes and transfers.

Education, healthcare, and housing costs have all risen. Since 2002, overall inflation has increased by 36 and 32 percentage points in the United States and in the European Union, respectively, while the nominal price of education has increased by 101 and 77 percentage points. Healthcare costs have also exceeded inflation in both Europe and the United States.

Further increasing financial fragility has been the rise in household indebtedness, which jumped from 87 percent of net disposable income in 1995 to 121 percent in 2008 and 123 percent in 2017.

People are not feeling optimistic about the future and their own personal economic situations, and surveys show a waning of public trust in governments and other societal institutions. In one global survey, 60 percent of respondents said they believed their country was “on the wrong track.” Income inequality and wage stagnation are causes of particular dissatisfaction. Almost half of the people polled in 16 advanced economies believe the average person in their country is worse off today than 20 years ago.

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Beyond cyclical factors, long-term global trends have also contributed to changing economic outcomes and will likely continue to play out in coming years.

The declining labor share of national income has been driven by structural changes in advanced economies since 1980. Its causes and effects are widely debated in the literature, with some evidence that it contributes to wage stagnation. … The largest declines have been in France, Germany, and especially Spain, where the labor share has dropped by 12 percentage points since the 1980s. The United States has seen a 5 percent decline in the labor share since 1980; three-quarters of that decrease occurred since 2000.

Skills requirements for workers will likely change as machines increasingly complement the work of humans, with basic cognitive skills no longer sufficing for many jobs, while demand for technological and social and emotional skills rises. A similar trend is occurring in connection with cities and job locations.

Changing dynamics in the business world also affect workers. Over the past 20 years, 70 percent of GDP and gross surplus gains across G-20 countries have accrued to a handful of economic activities including finance, real estate, tech, pharma, and some business services. This drives strong wealth effects in the form of gains to holders of physical assets (real estate) and intangible assets. While these sectors tend to be light on labor, high-skill workers associated with these activities see gains. Moreover, the search for assets in these sectors fuels geographically concentrated searches for talent, IP, and other intangible assets that reinforce the gains to these locations, contributing to the growth of “superstar” cities that are gateways of finance, tech, and innovation activity, and which are pulling away from peer cities in terms of income growth. The impact also contributes to a bifurcation of growth prospects within superstar cities, which have some of the highest levels of urban inequality among the world’s cities.

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New consensus will need to be found among policy makers, business leaders, civil society organizations, and citizens to enact meaningful change. Any such consensus will need to be built on a national level, given the broad divergences among countries on the issue. Multilateral cooperation may also be needed, especially relating to trade and tax policies.

Policy makers, academics, business leaders, labor organizations, and others are examining ways to widen economic opportunities and improve outcomes for all. Among other efforts, these could include:

  • Providing access to quality healthcare and education.
  • Rethinking work and skills.
  • Addressing biases and discrimination while promoting diversity and inclusion.
  • Employing new metrics and incentives to encourage social value creation.
  • Solving for how economic gains are shared.
  • Designing social assistance for the modern age.

 

For policy makers, business leaders, and other stakeholders, the current climate of mistrust and waning confidence in institutions creates a new urgency to work together to build social consensus and find effective solutions for a more inclusive future.