A mighty megatrend returns

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Prior to the Covid-19 crisis, the growth of households in the income segment that can be described as the lower-middle class was one of the global megatrends that I assessed to be among the most significant. But how is it going with this megatrend, which, just two years ago, was forecasted to lift more than a billion people from poor economic living conditions to a higher income class over the next 10 years?

The megatrend is most of all put on hold, or perhaps more correctly, delayed. Some analyses suggest that the trend even reversed in 2020. Millions of families experienced such a large decline in income that they dropped out of the lower-middle class segment and faced a poverty-like situation again. This is pronounced in India, but it is also the case in several Far Eastern countries.

The income threshold for defining the lower-middle-class varies, as domestic purchasing power obviously plays a major role. My observation is that in many analyses, an annual household income of $ 15,000 to $ 30,000 is considered to be the global level of lower-middle-class income. The stated annual income is for a family of four, but the household income for “lower-middle-class income” will be higher in Western countries.

Right now, many Western economies are suffering from bottlenecks in the global supply chain, and many Emerging Market countries are being challenged due to the lack of Covid-19 vaccinations. These challenges are delaying the journey back to economic growth prior to the Covid-19 crisis.

In Emerging Market countries, I believe that one can observe a relation between the vaccination rate and the GDP growth.  In addition, I pay attention to whether the country is a net exporter or importer of energy, as well as how strong the individual country’s fiscal policy muscles are to support the economy further after the crisis.

These elements are all delaying elements, but not necessarily factors that change the global economic direction. Therefore, it is my assessment that the natural movement of households rising from very modest income situations to the economic lower-middle class will return at some point. The question is, has the crisis created other movements in the global labour market that might affect the growth of the lower-middle classes?

It is obvious that there is a shortage of labour in the gastronomy and transport sector in several Western countries. That development has been underway for a while, so to me, it has only been a question of how large of a wage increase unskilled employees in the service sector could look forward to. I can imagine that it will result in nice wage increases in several countries. It is not impossible that unskilled workers in the service sector belong to the lower-middle class, making the wage development for this occupational group is interesting. The UK has been in the medias quite a bit lately concerning these issues and is a good example as graphs one and two show. The number of vacant positions continues to rise, and now, wages are also starting to seriously rise.

The low-wage households in Western countries naturally have incomes that exceed the aforementioned global average income level. However, from the point of view of the national purchasing power in the individual Western country, I am not convinced that even large wage increases for unskilled workers in the service sector will, in the long run, lift these households further up the hierarchy of middle classes.

A notable effect of the Covid-19 crisis is the desire among many white-collar employees to work from home. Some companies have already introduced hybrid work models, where employees work alternately at home and in the office. Other white-collar workers and their employers have found solutions that are almost exclusively based on a home workplace.

My thinking about a solution solely based on a home workplace environment is that it very easily looks like outsourcing. Thus, it is obvious that employers will begin to consider whether the price of these “outsourced” jobs could be organised differently and more cheaply and start a downward wage slippage for these jobs.

Similar to what skilled employees in Western manufacturing companies experienced when their jobs were outsourced to Asia, the described “outsourcing” could be the next opportunity for large companies to transform well-paid jobs to lower-paying jobs. I see an increasing risk that there is also increasing movement in Western economies towards the direction of more households experiencing declining incomes on the way to the group of households that belong to the lower-middle-class-income segment.

The Covid-19 crisis has, at minimum, delayed one of the global megatrends I have regarded as very important when looking towards the end of this decade. 

My first re-assessment of this megatrend, while the world is still on its way out of the crisis, is that over the next 10 years, low middle class households (measured by income) will still be the fastest growing income group. In Emerging Market countries, the trend will re-emerge where poor households rise towards the lower-middle class.

For the past few years, the United States has also experienced growth in the lower-middle class, but this is due to households losing income. Both in Europe and the USA, I could imagine that this development will return in a couple of years, among other things, due to the indirect outsourcing through work-from-home jobs. This development is important for the expectation of future purchasing power, as well as which products will be in demand.

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