Poorer than their parents? Flat or falling incomes in advanced economies

The rise of income inequality in advanced economies has generated serious debate and academic research, with much of the recent attention focused on the increasing concentration of wealth in the richest segments of the population. In this report, the McKinsey Global Institute has approached the issue of inequality from a different perspective by examining the share of the population whose incomes have stopped advancing when compared to people in the past with similar incomes or demographic profiles. This is an aspect of inequality that has received relatively little attention, perhaps because prior to the 2008 financial crisis less than 2 percent of households in advanced economies were worse off than similar households in previous years. That has now changed: two-thirds of households in the United States and Western Europe were in segments of the income distribution whose real market incomes in 2014 were flat or had fallen compared with 2005. In this research we set out to quantify the proportion of households in advanced economies with flat or falling incomes. We try to understand how much the recession and slow recovery since the financial crisis were the primary causes, and how much is attributable to other long-run forces. Finally, to help inform a debate, we catalog interventions that have been used around the world to address the problem and that could become part of a societal agenda to overcome the issue.