“Life has changed substantially for individuals in advanced economies in the first two decades of the 21st century,” notes The social contract in the 21st century, a new report by the McKinsey Global Institute (MGI). “In many ways, changes for individuals have been for the better, including new opportunities and overall economic growth… Yet, the relatively positive perspective on the state of the economy, based on GDP and job growth indicators, needs to be complemented with a fuller assessment of the economic outcomes for individuals as workers, consumers, and savers.”
The report takes an in-depth look at the changing economic outcomes for individuals between 2000 and 2018 in 22 advanced countries, - 16 European ones, Japan and South Korea, Australia and New Zealand, and Canada and the US. In aggregate, these countries constitute 57% of global GDP.
The report closely examines the evolution of the social contract, that is, “the arrangements and expectations, often implicit, that govern the exchanges between individuals and institutions.” Its overriding finding is that the social contract has changed considerably in the 21st century, with individuals having to assume greater responsibility for their economic outcomes. Opportunities for work and employment rates have risen significantly, but outcomes vary considerably across socioeconomic groups and geographies. While many have benefited from this evolution, those in the bottom 60% of the income distribution are facing significant economic challenges, leading to an uncertain future and a general loss of trust in institutions.
The report analyzes the evolution of the social contract by looking at the changing outcomes for individuals as workers, as consumers, and as savers. Let me summarize the findings in each of these three categories.
Employment has risen amid growing labor market polarization and wage stagnation
Employment has risen to record levels in the 22 countries studied. The employment rate for working age populations (15-64 years) rose from 68% in 2000 to 71% in 2018, with the number of working-age people increasing by 45 million, - 31 million women and 14 million men.
The rising employment rate has been primarily driven by the rise in part-time employment, - including alternative forms of work, i.e, the so-called gig economy. Part-time employment increased by 4.1% between 2000 and 2018, while full-time employment fell by 1.4%, - a net employment increase of 2.7%.
However, even though the employment rate has been at record levels in the US, the working-age employment rate fell from 74% in 2000 to 71% in 2018 due to the rising share of discouraged workers. In the US, part-time employment increased by 3.4% while full-time employment declined by 6.8%.
The increased digitalization of their economies has been a major factor in the polarization of employment and wage distributions over the past two decades. Across the 22 countries, job opportunities have expanded for both high- and low-skill occupations while contracting for middle-skill jobs. Between 2000 and 2018, 7 million middle-skill jobs were lost in the US and the 16 European countries for which data are available.
Wage stagnation has been a serious challenge for many workers. Between 2000 and 2018, average yearly wage growth was just 0.7% in all the 22 countries. Over the same time period, the share of total income of the bottom 40% of workers decreased by 1.2%, was approximately flat for the middle 40%, and went up by 1.2% for the top 20% of workers in the US and the 16 European countries for which data are available. In the US, the median wage for high skill workers grew by 7.3%, by 1.1% for mid skill workers, and by 5.3% for low skill workers.
In addition, recent studies have found a growing economic polarization across a country’s geographic regions. Urban areas are seeing faster employment and wage growth while smaller towns and rural areas are falling behind. In the US, net job growth through 2030 will be concentrated in urban areas, while much of the rest of the country may see little employment growth or even lose jobs.
Discretionary goods and services are cheaper, but the cost of housing and other basics has risen
Costs have fallen for most discretionary goods and services, such as clothing, communications, recreation and furnishings, which account for roughly 25% of consumer spending in advanced economies. In addition, the Internet, smartphones and other technologies have given rise to new discretionary consumption, some of which is available to consumers as free services, e.g., access to information, e-mail and social media.
However, the costs of housing, healthcare and education have risen faster than general prices, absorbing much of the income gains for many mid- and low-wage workers. Average housing costs have increased by almost 40% in the US and European countries between 2002 and 2018. Since housing accounts for roughly 25% of consumption, rising housing costs have led to a decline in the purchasing power of many workers.
Healthcare represents 4% of spending in European countries and in Japan. In the US healthcare accounts for 9% of spending, and, at 17%, it’s the second most significant driver of consumer prices. Healthcare has significantly improved over the past two decades: life expectancy at 65 increased from 18 to 20 years, mortality from cancer decreased by an average of 15%, and diabetes mortality declined by 20%. “Technology promises to drive further improvements, with innovations such as predictive diagnosis algorithms, health monitor implants, and synthetic biology.”
Education costs went up in all countries except Japan, especially in the US and the UK. Education accounts for 3% of spending in the US, 2% in Japan and 1% in European countries. Access to education has also improved. In particular, tertiary attainment rates, - including trade schools, college and universities, - increased from 28% to 42% of the 25- to 64-year-old population. In addition, online courses are democratizing access to education and skills.
Individual and institutional savings have declined at a time of increasing longevity and aging populations
Since people are living longer, the expected number of years spent in retirement has increased from 16 in 1980 to 20 in 2018. But, guaranteed pension levels have declined by an average of 11% since 2000, as governments and private-sector institutions have shifted a larger responsibility to individuals for their own retirement savings. Many pension systems have changed from defined‐benefit plans, for which institutions guarantee a minimum return and thus bear the market risk, to defined‐contribution plans, for which individuals bear the market risk.
“Yet household saving rates fell in 11 of the 22 countries; in 2017, more than half of individuals did not save for old age.” The net pension replacement rate, - which measures how effectively a pension system provides a retirement income to replace pre-retirement earnings, - has decreased by 11% for the average person across the 22 countries in the study.
While much has improved for individuals in the first two decades of the 21st century, many challenges remain. To help achieve better and more inclusive outcomes in the decades ahead, concerted action is needed on two fronts: “first to make sure that the gains of the 21st century so far are sustained and scaled, and the potential for even more opportunities and economic prosperity is fully realized. Second, to make sure that the outcomes for individuals in the next 20 or more years of the 21st century are better and more inclusive than in the first 20 and increase broad prosperity.”
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