US income inequality rift continues to widen

01 August 2017

Income inequality has been a thorny issue in the United States throughout the previous century. Now, financial disparity seems once again to be growing, with a new study painting an uncertain future for many in the country.

The US national debate has been absorbed over recent months with the Roman circus that has been the media storm surrounding Donald Trump’s controversial Presidency, with most of the discussion focused almost exclusively on alleged collusions between the new White House administration and Russian cyber criminals. Amid the continued uncertainty surrounding the current White House, the economy has continued to grow, in spite of growing global concern. However, the growth seems to do little to assuage growing inequality in the United States, an issue which in a more conventional Presidency might have come to the fore sooner.

The divide between rich and poor has debatably never been greater in the USA, and certainly never so emphatically illustrated, with a billionaire business magnate spending public funds heavily on trips to Mar-A-Lago, while attempting to dismantle a health care system implemented by the previous administration to give health insurance to society’s most deprived. In a new report from McKinsey & Company, titled ‘Making it in America’, the research arm of the consultancy firm lays bare the changing dynamics for labour income in the US. The research explores changes over the past five decades, as well as considering the future for the country’s working-class and middle-class populations in Trumps America – while drawing the troubling conclusion that hard work does not unconditionally pay dividends, even in the self-styled land of opportunity.

Many workers not making it in America

In spite of the claims of the keepers of the flame of Reaganomics, trickledown theory economics appears to have failed to benefit anyone but the wealthiest Americans, having first been implemented in the 1980s during former actor Ronald Reagan’s two term Presidency. Income for the lowest two thirds of the US population has been effectively stagnant since the recession in 1983, even falling in real terms relative to the troubled late 1970s. Income for the highest quintile, however, has grown in leaps and bounds since the early 80s, at CAGR 1.83%, with income for the group increasing more than the total income of fourth quintile to around $160,000.

McKinsey’s researchers note that some groups have taken harder hits than others. While much of the new work since 2010 has gone to lower wage industries, the vast majority of new hires – 99% of the 11.6 million jobs added from the bottom of the recession through to 2016 – went to those whom have at least some college education – while 77% of the 7.2 million job losses in the recession affected those with a high-school diploma or less. A lack of job creation for higher paid “white collar” jobs has seen graduates increasingly forced to compete in “blue collar” sectors, leading to those without paper qualifications increasingly unable to land unskilled work, while many of the ‘new’ jobs are placed in the hands of those whom are overqualified for them, presenting a huge waste of talent in both directions. Under 35s meanwhile, who tend to have a college qualification and are subsequently lumbered with student debt, have seen their real wages shrink significantly since 1983. With graduates now less able to repay their loans, national student debt has lept to $1.34 trillion in 2017, from $400 billion in 2005.

Mind the gap

While wages across have remained stagnant across most income quintiles for the past almost fifty years, various industries have seen wages decrease over the period since 2983 – particularly those in capital intensive industries.

Labour incomes not growing in real terms

The biggest drops were noted in transportation, retail trade and construction. Retail trade remains one of the country’s largest private sector employment sectors, at 10.9% of the total working population. Unsurprisingly perhaps, financial services have seen by far the biggest increase, almost doubling its Index score, while the sector employs around 5.3% of US private sector workers.

The study suggests that the structural conditions, which affected real wage growth even before the recession following the financial crisis, are set to continue to affect real wage growth for workers, even if recovery continues. These conditions pertain largely to technology shifting productivity from labour intensive processes to knowledge intensive processes; in addition, competition has heated up in various sectors, while the number of potential employees has increased – creating an increasingly uneven playing field between labour and capital, which has affected wages and employment levels for lower-skilled workers.

Capital intensive industries hit hardest

In addition, the firm notes that capital-light industries tend to be out performing capital heavy industries, while across the board the research points to “superstar” companies, gobbling large amounts of profit, creating rich rewards for their workers, while depleting the rest of the industry of success. A recent report into corporate profit found that there is considerable profit inequality between firms, 10% of corporate entities hover up 80% of profits.

The increased pressure on labour is reflected in its declining share of national income – even while the higher income quintile has seen its share of total labour income increase significantly. In total, compensation for employees has fallen from 67% of total income in 1980 to 62.6% in 2016. Meanwhile, corporate profits have skyrocketed, up from 5.6% in 1980 to 9.6% in 2016.

Labour share of national incomes declined

Aside from facing stagnating wages, various aspect of necessary costs for workers have continued to rise. Proprietors’ and rental income has also increased significantly, from 7.9% of total income to 13.2%, while house prices have become unaffordable for large numbers of US workers. As such, rent and basic utility bills now eat up around 50% of the income of the lowest paid workers in the US.

American Dream

Workers are finding a range of barriers to gainful employment, including increased skills mismatches, fewer pay-roll positions as companies increasingly outsource, utilise contractors or use temporary workers. In addition, companies have started to hollow out benefits, while poor health – and no access to quality insurance – means that many workers face internal and external barriers to employment. Switching jobs too has become more difficult with ‘non-compete’ agreements limiting their options, as well as changes in market dynamics to urban areas, while moving has become increasingly difficult, the number of individuals relocating in a given year, is near 12%, down from 20% in the mid-1960s.

Automation effect

The research notes that the future for many US workers, particularly on low incomes, is relatively bleak. In line with trends across the Western world, the market is moving toward less secure work, from outsourcing to contracting, is set to see 32 million that undertake independent work as their main income. This group has no benefits, and is often not paid the full cost of their labour – reducing their ability to save for retirement, illness and other areas in which nominal workers have protection from risks. Particularly the low-skilled in this group are set to find life increasingly onerous.

In addition, new forms of automation, which boast lower costs and higher productivity, have the potential to significantly affect employment levels within various sectors. While in the UK recent projections suggested AI may only create jobs to replace 19% of the jobs it ends, this figure could be even higher in the US – particularly for low-skilled, physical labour positions. Accommodation and food services, manufacturing and transport and warehousing, areas that represent a large segment of the labour economy, could see more than 60% of current activities automated over the coming decades.

The firm notes that there are looming questions for the US, particularly as inequality as such is set to rise, while the country’s major infrastructure continues to show signs of decay. While the need to invest in infrastructure could conceivably create an employment boom in the country, little movement has so far occurred to actually realise that, while the pay and conditions of any such work may well fit with the national trend that will see the subsequent labour created valued excessively lowly anyway.


High employment drives deals to access fresh talent

09 April 2019

The UK continues to have a historically low unemployment rate, resulting in a tightening employment market and demand for recruitment services. The industry topped £12.3 billion last year, while valuations continued to rachet up. There were were 32 firm acquisitions in the recruitment services space last year, up significantly on the previous five-year average.

Labour markets globally are tightening, particularly in developed economies. At the same time, access to top talent is becoming increasingly difficult to source, as demand for that talent continues to rise. Higher demand has been one of the key drivers for acquisitions in the space. New analysis of the recruitment M&A market, from consultancy firm BDO, looks at current trends and future projections for activity in the segment.

The UK employment rate has grown considerably over the past decade, with the number of NEET decreasing, more women joining the workforce, and older people continuing to work, among other trends. Participation rates hit more than 75% in 2018, up from around 73% in 2014. The unemployment rate dropped to 4.1% last year, the lowest level in more than 40 years.

UK Recruitment Market


The recruitment industry has enjoyed strong growth over the same period, with revenues increasing from around £8 billion in 2014 to £12.3 billion last year. However, the growth rate for the industry is expected to stall for the coming years – the firm is projecting annual growth of 0.1% to 2024. The stall reflects deep seated uncertainties stemming from the future of the UK, from migration to internal employment in an increasingly uncertain future.

According to the firm’s analysis of market trends for UK listed FTSE recruitment companies, their performance over 2018 outperformed the wider FTSE market by a significant market during some months – the end-of-year uncertainty hit both recruitment and non-recruitment firms with relatively equal strength. The drop partly reflects market sentiment about the future of the UK.

FTSE Listed Recruitment Firms Average EV/EBITDA Multiple


The study also considered the multiples growth, average EV/EBITDA multiples, over the past year – which has shown considerable ups and downs. The yearly average multiple of 10.4x was above that of 2017’s 9.9x – although a 26% drop at the end of the year was significant. The drop was tied to the relative volatility in macroeconomic conditions affecting the globe, though another major contributing factor has been Brexit and political instability.

Global M&A

The global recruitment M&A market was particularly active in the UK, with 32 deals last year – a five-year high, and well above the 17 recorded for second-place US. Deal activity in the UK was focused on expertise and capacity in industrial and technical sectors, reflecting skills shortages in those segments. The US was largely focused on healthcare-related M&A, representing 25% of their market.

Overall, of the 92 deals in 2018 (a 21% drop on 2017) generalist firms were the most in demand, at 25% of the total, followed by education at 14% and engineering & construction at 13%. Software saw relatively low demand, at 2%.Investment into the UK by country

In terms of investments made into the UK, domestic investment continues to be the most dominant, accounting for 24 deals. Japan made three deals, although Brexit is seeing the country become increasingly nervous about investment. The US accounted for two deals. The longer-term trend shows that domestic investment is up on 2017, hitting the highest level in five years, while the US has reduced its M&A investment into the UK.

Commenting on the results, the firm noted, “The latest report shows the recruitment sector remains strong and continued to grow through 2018 despite facing many challenges. Notwithstanding the personalised nature of these services, the market continues to evolve, seeing traditional recruitment firms utilising available technology along with new entrants showcasing innovative platforms.”

Related: High UK employment masks troubled economy.