Living in between times: What do leaders need to think about when the world is changing?

We are living in uncertain times. Politically, it is a period defined by the rise of populism fueled by increasing economic inequalities across the world. Economically, upward mobility is more difficult for the middle classes in mature market economies than over the last 50 years or so. According to the OECD Income Inequality Update, income inequality remains at record-high levels in many countries despite declining unemployment and improving employment rates. Higher-income households have benefited more from the post-financial crisis recovery than those with middle and lower incomes. 

Inequality is being talked about in many countries but is it the same everywhere? Across OECD countries, the average Gini coefficient of disposable household income reached 0.318 in 2013/14 (latest figures), up only slightly from 2007 (0.317), but the highest value on record since the mid-1980's. (Note: a Gini value of 0=perfect equality, 1=perfect inequality).

The Nordic countries are among the most equal European countries, but some Central Eastern European countries, like Slovenia, the Czech and Slovak Republics also have lower levels of income inequality. Germany has higher levels of inequality than these, but is close to the European average. Overall, inequality levels in Europe are lower than in the United States. In the US, inequality has grown at an alarming rate especially since 1980, where the bottom 60% of Americans have seen no growth in earned income and continue to experience adverse policy changes to the social safety net.  

When considering a different indicator, the percentage of national income earned by the top 10% or even 1%, we see similar patterns. The US has the highest concentration of wealth. Germany sits in the middle and the Nordics have the least concentration. However, these values have increased across a range of countries since the tech bubble burst of the early 2000’s. 

In the US, the Federal Reserve recently reported that the top 1% of families increased their share of income from 20.3% to 23.8% between 2013-2016. The bottom 90% of families now make less than half (49.7%) of the country's income, down from more than 60% in 1992. In Germany the household incomes of the richest 10% increased by 27% between 1991 and 2014 according to the German Institute for Economic Research. Middle class incomes increased by 9% over the same period, while households at the bottom saw their incomes drop by 8%.

Even Sweden has seen a marked growth of income inequality since the early 1990s, despite the fact that it still has one of the more equal income distributions in the OECD. The growth in inequality between 1985 and the early 2010s was the largest among all OECD countries, increasing by one third. In 2012, the average income of the top 10% of income earners was 6.3 times higher than that of the bottom 10%. This is up from a ratio of around 5.75 to 1 in the 2007 and a ratio of around 4 to 1 during much of the 1990s.

As we transition to a more technology driven labor market, in the short to medium term, inequality is likely to persist if not worsen. Technology will continue to replace repetitive jobs. People in these kind of jobs are already experiencing relatively low levels of income and high levels of economic frustration. The disintegration of this part of the labor market will create further economic pressures on individuals and families, especially at low income levels. In the long term, new roles and ways of earning an income are likely to emerge and a different mix of skills needed. But how quickly and how many of these jobs arrive is still unknown. 

Given this current state, and the potential impact of increase automation on the labor market – at least in a transition period - can inequality be reversed?

Will we continue the current trend of accumulating wealth in a way that benefits small groups of people in our societies while leaving the majority behind? Or will we find ways to share the wealth that will be created as a result of the digital revolution more equally and how will we best do this?

Who should even ask and answer these questions during this period of transition where we are evolving to a more technology driven society?

In my view, the future of inequality is ultimately dependent on how we define the future of work and our societal response to it. Governments, businesses and citizens will need to focus not just on economic parameters but on what kind of societies we want to create going forward. 

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The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.