The Future of Work – Wages, income inequality, skills and transition

For large shares of the population in the advanced economies, there has really been no positive movement or no sense of progress in terms of where their incomes have gone over the last one to two decades. When we looked at the data across the US as well as a set of European economies, we found that for as many as two-thirds of households at the level of market income, which is what they earn mainly from wages, incomes were flat or falling (Exhibit 1). Even after taking into account transfers that they received from their governments, there was still something like 25 percent of the population that didn’t progress and, in fact, had fallen behind.

So, this is a very significant trend, because apart from shaping living standards and access to opportunity, we also found that it influences behaviors and attitudes about what people expect and how they view the ability of the state or how they view issues like globalization, foreign trade, and immigration. A lot of these attitudes are colored by this phenomenon of just not having made progress.

The recession did play a role. But what we found is that the recession actually unpeeled and revealed a set of underlying trends that were driving this phenomenon. These trends differed based on the countries we looked at. In some of the countries in Europe where aging is important, or where the structure of the household is changing, you see smaller households, older people, and fewer earning members per household. Those demographic shifts had begun to accumulate in countries like Italy, leading to this notion that household income wasn’t advancing.

In the US, demographics really weren’t the issue. There was some unemployment, but it was more the issue that the share of wage income and the overall pool of whatever economic growth there was, that share of labor income was falling. And it was also the case that for many less-skilled people, they were not able to either find work, or they were just working fewer and fewer hours. There wasn’t enough work to go around, and then there weren’t enough wages coming out of that work. So, these two factors were the most important in the US.

It wasn’t easy to disaggregate, but what we did find is that it was highly correlated with educational levels and skill levels. We did find that mid-skilled and lower-skilled people were the most affected. There was enough evidence to suggest that skill biased technology. Technological absorption and adoption by all these businesses has, over a period of time, softened wages and reduced relative bargaining power of less-skilled people. That appears to have been a phenomenon that had a lot to do with this issue.

The jobs of the future will exist. The big challenge is not that the jobs won’t exist. The big challenge is how do you make the transition very fast and as friction-free as possible.

There are a multitude of factors that actually make transitions quite difficult between types of jobs. People don’t have the skills. People don’t have the means to figure out where the job demand lies. They don’t have the ability to actually physically move from where they live to where they need to work and therefore, working with both employers on the firm side but also with communities, with groups, with the educational system to make many of these friction-causing issues to be dealt with is going to be very, very important in the future.

Chosen excerpts by Job Market Monitor. Read the whole story at What will automation mean for wages and income inequality? | McKinsey & Company