NOVEMBER 2016 / NO. 2
TAGS: INCOME, INEQUALITY, EUROPE, US, ECONOMIC, COST-CUTTING, LAYOFFS

Income inequality will have a huge impact on everything

“Governments across the EU are killing the middle class with income inequality which will have a huge and negative impact on the prosperity of 70 – 80% of the total EU population from 2016 – 2025”
This statement comes from McKinsey publications in July and August 2016 on ‘income inequality’. This new reality means that a new generation of young people in Europe and the US risks ending up poorer than their parents. From 2005-2014 around 65-70% of the population faced flat or falling incomes. Prior to 2005, this percentage was just 2%. This means that 65-70% of the total population faced a lack of economic progress. The main causes were the aftermath of the 2008 financial crisis and the slow recovery that occurred since then. What are the implications?
  1. Everyone wants their children to progress and be better off than they were. For many people, however, this will be deeply disappointing
  2. There will be slower economic growth because the vast majority has less to spend
  3. Rising social tensions: with people worried about free trade, globalization, technology and migration
In the years before 2005, only some 2% of the population was not advancing, and this was not a big issue for governments when compared to issues such as unemployment and economic growth. The labor markets are still not really working for the vast majority of people.
What may have worked in the past, does not work in the present: technology is replacing jobs (1), there is an increase in the number of jobs moving overseas through trade, offshoring and other factors (2), and finally there are the issues of migration and immigration (3). Over 200 million people no longer live in their home countries.
These developments are not good for the economies of countries in the EU. From 2016 to 2025, around 70-80% of the total population can expect to face flat to low rates of economic growth, high rates of unemployment, underemployment, falling wages and rising social tensions. As a result, savings will increase and spending by the middle class will stay flat.

What is the strategic impact of these developments?

The impact on the majority of companies as well as on society will be dramatic: lower investment, continuous cost-cutting, layoffs, less jobs due to robotics, underemployment, falling wages and more. In the next section, we will discuss insights as to what is happening in the US regarding the decline of the middle class from 61% in 2008, to 51% in 2016!!
“Automation and robotics will strongly increase in the next few years. As a result, wages will stay flat, although productivity will grow. According to McKinsey, this is called coupling of wages with productivity”
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