No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.

Amongst the new objects that attracted my attention during my stay in the United States, nothing struck me more forcibly than the general equality of conditions. I readily discovered the prodigious influence which this primary fact exercises on the whole course of society, by giving a certain direction to public opinion, and a certain tenor to the laws; by imparting new maxims to the governing powers, and peculiar habits to the governed.

The extent of the growing financial misery that hangs over the lives of the majority of people in the developed world is not recognized. Yet, the extent of despair is so large that the question is not “Why is there a populist revolt?” but rather “Why has the revolt not been far worse?”

From the end of World War I until the 1970s, Western world incomes have risen for both higher earners and the general population. Since then, however, by any measure, income gains have gone disproportionately to the most well off. In fact, since the start of this millennium, and despite the economy growing by a third, the median inflation adjusted wage has been all but stagnant. At the same time, incompressible costs faced by the lower and middle classes have continued to spiral.

SPIRALING COSTS AND THE BUDGET SQUEEZE: THE U.S. EXAMPLE

In fact, even as economies continue to grow, the average household’s ability to afford large but essential, incompressible items has been reduced. The cost of basic necessities like rent, healthcare, and education have continued to rise faster than the general inflation index. From 2010 to 2017 alone, rents in the U.S. have increased by 30% while wage grew by 0.5% annually U.S. Bureau of Labor. Similarly, the cost of social mobility, i.e., education, has continued its meteoric rise. This has left lower and middle-income families less well off today, and with less hope that the next generation’s situation would improve through education.

Indeed, be it in Singapore, Japan, Europe or the U.S., when I ask young parents if they would consider having a second or a third child, I nearly always get the same answer: “We could not afford it.” We want the best for our kids, and even though we are allegedly wealthier than before, middle class families can no longer afford the “luxury” of paying for this extra child. Not so long ago I was a young working father shocked by the cost of a top-notch kindergarten in London, which is equivalent to a working person’s entire annual salary. That is if you get a slot, for, the locals say only half-jokingly, that it is easier to get your kid into Harvard than into a London kindergarten. That’s only kindergarten. The price of real estate in neighborhoods with good government schools is appalling even by London’s standard. It is no exaggeration to say that the consequences of this bind can get downright spiritual: Young parents in London unable to pay for private schools often find they are struck by a renewed sense of religious faith as they can try to secure their kid a slot in a Church of England school. (Buckley). No wonder education concerned young parents pass on that extra child they just cannot afford.

Housing and health care represent about 15% of total expenses for lower income families12. In the United States for example, between 2013 to 2016, the cost of rent, healthcare and education have risen 6%, 8.5% and 5.4% per annum on average U.S. Bureau of Labor. Thus, the budget of lower income households has been ‘squeezed’ substantially more than reported by traditional inflation measurement. In effect, not only have incomes been stagnating but expenses on basic incompressible necessities have gone up more than nominal wage increases. These necessities are eating up more and more of average people’s budgets, meaning less and less is left over to spend on consumer goods, leisure, and the other things that make life pleasant.

The middle class is also facing this “budget squeeze.” And the budget squeeze is larger than reported because the consumer price index used to deflate wages is not income adjusted. In other words, the stagnant real wage growth for the middle class would look even worse if it reflected the fact that the cost of ‘compulsory’ goods and services purchased by lower and middle-income people has risen more than average consumer prices as a whole. Meanwhile, the cost of many goods like electronics and travel have risen more slowly or even fallen, a trend that disproportionately benefits the better off, even though the CPI misleadingly makes it look like the trend has benefited all income classes proportionately.

The stress on middle class budgets may have been further compounded by the steep increase in education costs, including child care. Education remains widely recognized by the middle class as the surest way for the next generation to achieve upward mobility. The budget squeeze has not only compromised the middle class’s current socio-economic standing, but also compromised the ability of the most talented children of the middle class to rise in the world. In this, we are all losing.

In response to this budget squeeze and rising education costs, middle class families have been having fewer children. Reducing the number of offspring alleviates education costs and preserves children’s opportunities to excel. From this perspective it is worth noting that there has been a documented correlation between lower natality and increasing protest votes. Surveys confirm that financial uncertainties have become a significant source of stress for 50% of Americans, ranking above family responsibilities and personal health concerns NPR/Robert Wood Johnson Foundation/Harvard School of Public Health.

In the ’70s my single mother was single handedly taking care of her five children the best she could, working hard to make ends meet, an official secretary job during the week, and undeclared assistant or waitress during the week end. She had tremendous courage and energy, but money was desperately short. In order to make sure we would make it to the end of the month, we had a system of thirty envelopes, where bank notes were dutifully put for each day. Unfortunately, if any unforeseen issue had to be addressed, the content of the last envelopes would vanish like snow in June. At the end, budget constrained families face real pain. And they, better than any economists or politicians, know that at some point there is no longer any fudge.

Even with unemployment down over the Western world and in the U.S. in particular (from 10% in 2009 to 4% today), a large segment of the population has seen little improvement and feels financially stressed, susceptible to economic catastrophe at any time. Over 75 million American households, the bottom 60% of earners, take home pay of $65,000 or less. UBS reported that over 30% of these households do not have enough set aside to pay their bills for six months should they be laid off or become unable to work. The comparable figure for people in the upper 40% of households who report being “financially stressed” is a mere 3.6%. The Federal Reserve has reported that 40% of all U.S. household would not be able to cover $400 of emergency spending without borrowing or selling something Federal Reserve.

In 2015, nearly three out of four Americans regarded money as a significant source of stress. One out of four reported experiencing “extreme stress” about money in the last month, with one in five adults reporting they had skipped or considered skipping a medical treatment for financial reasons. One third of people with partners reported having financial disputes. As you would expect, the level of stress on lower income households is significantly higher than it is on high-income ones American Psychology Association.

When faced with essential costs that are rising faster than wages, it is hard to save. Half of Americans have less than $1,000 in savings. For most to make any reasonable provisions for retirements is all but impossible. Surveys reveal that over 40% of Americans will retire broke. In fact, many have gone into debt, debt that will ultimately be difficult to repay. The average debt of indebted Americans is now close to $150,000, with a total household debt now reaching $13 trillion. This amount has doubled in 15 years; today 65% of Americans have a mortgage, 50% have credit card debt, 25% have students loan debt and 21% have medical debt GoBankingRates Federal Reserve Bank of New York.

The increased debt perpetuates the situation, for debt is inherently a transfer of future income from the debtor to the lender. This implies that future cash flow, if only in interest, will go from the poorest indebted part of the population to the better off savers who have already seen their incomes increasing and assets growing. So, if the increased personal debt has not been used to invest in assets or skills that will generate sufficient income, it will inherently serve to perpetuate or even deepen disparity.

This wage growth below costs, and the debt phenomenon that follow inescapably from it, prevails not just in the U.S. but across the whole Western world. Indeed, between 1975 and today, household debt to income ratio in G7 countries has, roughly, doubled OECD.

Share of National Income: Top 1% Vs Bottom 50%, U.S. (When The Majority Hurts)

Global Inequality And Growth (When The Majority Hurts)

Top 10% Vs Average Income, U.S. (When The Majority Hurts)

Basic Needs As % Expenses By Income (When The Majority Hurts)

Income Gains Repartition Since Wwii (When The Majority Hurts)

Basic Needs Change In Price (When The Majority Hurts)

Source of Stress (When The Majority Hurts)

APA

Earning Less Than Your Parents (When The Majority Hurts)

Share of Labor Income Repartition By Skill (When The Majority Hurts)

Wages Vs GDP, U.S. (When The Majority Hurts)

Non Housing Debt Balance, U.S. (When The Majority Hurts)

Wealth And Assets Per Wealth Percentile (When The Majority Hurts)

Household Debt Income Ratio G7 (When The Majority Hurts)

RISING INCOME FOR THE FEW ONLY

500 million people in the 25 richest Western countries have had flat or falling income in the last decade. 70% of households in these economies experienced no increase in real earnings from 2005 to 2014 McKinsey. At the same time, the top 1% of the global population received 20% of the total global income World Inequality Report. In advanced economies, the labor share of income declined significantly from about 55% of GDP in the 70’s to below 40% in 2014 IMF.

For decades now, with ups and down following the economic cycle, the medium and low skill workers in the Western world have seen their income stagnate. In the U.S., since the early 70’s, the hourly inflation-adjusted wage for an average worker has been essentially flat (rising by 0.2% per year). High skilled did far better. Wages received by Bachelor’s degree holders grew from 134% of high school graduate to 168% Harvard Business Review.

Further, despite the extension of the average number of years spent studying, young people entering the labor force are earning significantly less than their elders did at the start of their careers. In other words, the young higher skilled may indeed earn more but, collecting graduate degrees, they enter the labor market later and in debt. In the meantime, less qualified young people, the bulk of the Millennial generation, are earning less than ever before Fortune, 2018.

This is not unique to the U.S., even if it may have been more extreme there. In the U.K., the wage share of income is now the lowest it has been since WWII. The share of national income has decreased from 80% to 73% since the 70s. Since 2010, while the GDP grew by 12%, earning per employee fell 6%. This led the Archbishop of Canterbury to declare “Our economic model is broken … the gap between the richest and poorest parts of the country is significant and destabilizing”. IPPR

The same phenomena can be observed even in Sweden, where the portion of GDP going to wages is now the same or lower, depending on whether or not one accounts for capital amortization, than it was in the ’70s. Not surprisingly, the drop is more pronounced in manufacturing, which is more susceptible to competition from lower wage countries’ imports than local services. In Sweden, the share of wages going to high-skill workers is growing, leaving less for their low- and medium-skill counterparts Sanandaji, 2013.

The Western world-wide great wage stagnation is not the result of a stagnating economy, nor even a decrease in productivity. From 1948 to 1973, productivity was up close to 100% and hourly wage compensation was up more than 90%, broadly in line. But in the forty years from 1973 to 2013, productivity was up close to 75%, and hourly compensation less than 10%. While it is true that productivity growth has halved (from roughly 2.7% to 1.4% per year), the growth has nonetheless continued. But for 40 years barely any of the productivity gains have gone to labor remuneration AFLCIO, 2015.

The reason for this pressure on the wages of all but the highest skill Western world workers is not an inability to generate additional income or profit to pay for labor. Rather, there is downward pressure on the price of labor. There are multiple sources for this pressure, but three in particular have been thoroughly documented: Automation, Globalization, and deunionization.

First, the young technology of automatization has, understandably, started with the easiest tasks. While automation may soon offer real competition to white collar workers, its first victims have been low- and medium-skilled workers. The gains from automation and computerization of these simple tasks have been accruing to capital, i.e., investors, the wealthiest among us Huffington Post.

If this was not bad enough Western workers had globalization to contend with. The lower cost of transport and communication, together with decreases in tariffs and market openings, have flooded Western countries with cheap goods imported from countries with low wages, putting even more downward pressure on Western wages.

Finally, deunionization and the weakening unions have translated into a decreased ability of workers, particularly lower and middle skill workers, to collectively bargain, and thus to obtain better wage compensation.

Deunionization is a long-standing phenomenon that is continuing. Since 1983, the rate of union membership has steadily declined from 20% to less than 11% in 2017 U.S. Bureau of Labor.

The shrinking share of the workforce that is unionized is both a cause and effect of the weakening of unions. Smaller unions have less bargaining power, while decreased bargaining power makes unions less attractive to workers, who are then less likely to join them.

The ability to import cheap alternative goods, to relocate factories in cheaper places and the increased degree of automation all contributed to steadily weakened unions. Part of it is ‘technological’, part of it is ‘globalization’. From this weakened negotiating position, unions have been less able to capture any share of the gains from automation for workers. As a result, workers have had to adjust their wages to compete with machines and computers, foreign alternatives, and foreign imports, capping potential wage increases.

In documenting wage stagnation, it is telling to compare the West’s two largest economies, Germany and the U.S., whose balance of payments and indeed industrial sector performance have been strikingly different in recent decades. It is hard not to think of Germany as a winner of globalization, or at least of the European Single market, while the U.S. has continued to lose industrial segments and sustain material deficits, possibly because of its role as provider of the international currency of reference13. Despite these divergent responses to globalization, the effects on wages in these two countries have been remarkably similar, if more pronounced in the U.S.

A case in point is the impact of low wage competition from Eastern Europe on Germany. The former eastern block countries integration into the Single Market severely affected the German manufacturing wage structure of working age men. From 1985 to 2010, trade generated job losses for the low skilled category and substantive relative gain for high skilled jobs. There was “a positive and significant impact of import exposure on the rise of wage inequality within industries.” Skilled worker become more valuable, but “low- and medium-skilled workers lose their jobs or downgrade to low-paying jobs”. This resulted in structural alteration of wage distribution reflecting the changing demand for skills. For the German industry, a winner in globalization, the effect of trade accounts for up to 19% of the increase in wage inequality, whilst automation accounts for approximately 17%. Further, “the impact [of trade on wage inequality] in industries with a lower decrease in unionization is significantly smaller and roughly halved, at least for the general inequality measure”. DICE.

The same can be observed with the declining labor share of income in the U.S. There, from 2001 to 2014, close to 50% of the decrease can be attributed to ‘routinization’, that is the automation of tasks; up to 40% to globalization, with a mix of import competition and foreign input usage (sub-contracting or components imports); and up to 15% to deunionization IMF.

For a time, low skilled native-born Westerners could at least count on stable or growing wages for local service jobs that were non-outsourceable, such as for domestic helpers, construction, or food catering14. But even there, immigration of overwhelmingly low skill migrants has put further pressure on the wages of the more modest among us. It has introduced increased local supply of low cost providers, a source of low cost internal competition for catering to local need for non-tradable services, depriving ‘native’ – or previous migrants – low skilled workers of a previously protected niche, of a source of jobs hitherto sheltered from globalization15 National Academies of Sciences, Engineering, and Medicine.

Labor Share of Output (When The Majority Hurts)

IMF

Labor Share of Income (When The Majority Hurts)

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Different Generations Earnings Over Time (When The Majority Hurts)

Parent And Children Income Over Time, U.S. (When The Majority Hurts)

Productivity And Hourly Compensation, U.S. (When The Majority Hurts)

Productivity And Wage, G20 (When The Majority Hurts)

Wage Inequality And Trade, Germany (When The Majority Hurts)

Labor Share of GDP And Income Inequality, U.S. (When The Majority Hurts)

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U.S. Union Membership (When The Majority Hurts)

Factors of Labor Share Decline (When The Majority Hurts)

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