Income inequality highlights US manufacturing stress

02 November 2017 Authored by Consulting.us

Stagnant salaries and global supply chain flux are hitting US workers where it hurts the most - in their pockets. A new report assesses the challenges facing the US manufacturing sector and growing income divide between knowledge and labor intensive workers. 

America’s growing divide between the haves and the have-nots has been starkly illustrated in a new report from McKinsey & Company. In ‘Making it in America’ the leading consultancy firm assesses the changing landscape of the US labor market over five decades, concluding that lower-income and middle-class demographics have seen their incomes stagnate in relative terms, while a super-rich minority have enjoyed a wealth explosion.

Many workers not making it in America

McKinsey researchers found that, for the vast majority of American workers, incomes adjusted for inflation are no higher than they were in the early 1980s. The top quintile, however, has flourished with a compounded annual growth rate (CAGR) of 1.83% from 1983 to 2013. Average income in the top quintile now stands at $160,000, double that of the second-best performing quintile.

Labour incomes not growing in real terms

Workers with no college education are less secure against the wave of outsourcing and job cuts since the recession. Almost 8 in 10 (77%) of the 7.2 million job losses caused by the economic slump affected workers with no more than a high school diploma. Meanwhile graduates losing out on tighter competition in the white collar sphere have colonized traditional blue collar sectors.

The consequence is a double blow for unskilled workers, McKinsey reported, who bear the brunt of redundancies and are forced to compete with higher-qualified rivals for limited jobs. Talent is wasted in both directions, with overqualified graduates occupying blue collar space while expensive college educations are forgotten.

Capital intensive industries hit hardest

A graduate debt crisis was highlighted by the McKinsey researchers. National student debt has exploded to $1.34 trillion in 2017. Little over a decade ago in 2005 the debt was less than a third the size at a still alarming $400 billion. Saddled with debt, the under 35 graduate cohort have also seen their real wages shrink in the past three decades.

Regardless of education, all workers are also confronted with rapidly rising rental costs and unaffordable property values. Employees in the bottom quintile can expect to fork out at least half of their salary on rent and utilities alone.

Labour share of national incomes declined

Changing times

The employment landscape is changing in a way that poses serious obstacles for workers who lack the flexibility to cope with global business trends. Outsourcing, the use of contractors and temporary workers, the emerging ‘gig economy’, and harsher contractual stipulations have undermined the stability employees enjoyed in decades past. At the same time companies are cutting back on health, insurance and pension plans that have provided a lifeline for millions of families.

Automation-effect

The impact of automation will fill volumes of future McKinsey Global Institute reports but was given special mention here as likely to disproportionately impact lower skilled workers. In such sectors - which include hospitality, transport, and manufacturing among others - more than 60% of current jobs face being automated in the near future.

Even without the threat of automation or the impact of the recession, capital intensive industries have been in broad decline in the US for decades, McKinsey found. The biggest real wage drops were found in construction, transportation, and retail - which employs 10.9% of the private sector’s working population.

By contrast salaries in the financial sector - which accounts for 5.3% of private sector workers -  have shot up. McKinsey reports that this complements a broader productivity shift from labor intensive work to knowledge intensive processes. Within the world of capital-light industry, the report suggests that ‘superstar’ companies are absorbing huge profits and filtering them in-house among executives and highly-ranked professionals.

Boosting the manufacturing sector should be a pillar of US economic policy over the coming decades, McKinsey notes. Targeted spending could help generate millions of jobs but technology and global supply chain flux will be powerful factors in determining the satisfaction, health and take-home pay of the majority of workers.

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