MBA Research

Trend #39: Wealth Patterns, Changing Needs, and Marketplace Interaction

In the wake of the recession, most economists agree that while the U.S. economy has slowly made its recovery, the effects will be felt for years to come. In 2015, median household income rose 5.2% from the previous year, which was the largest single-year increase since 1967. While median household income is still lower than before the recession, the increases demonstrate that prosperity is consistently growing. However, most gains occurred at the top of the ladder, while those in lower income brackets are still struggling. The United States has one of the greatest income and wealth disparities of any developed nation. Over 70% of the wealth in the United States is held by the top 10% of people, with 35% of that wealth in the hands of the top 1%. Meanwhile, the bottom 80% of the country has only 11% of the wealth. 

Other countries, such as China, have their own challenges and opportunities related to changing wealth patterns. China has shifted from cheap labor and manufacturing to a more service-based economy with a growing middle class: 30 million Chinese are becoming part of the middle class every year. This change affects businesses domestically and internationally from a demand standpoint as well as resource-availability/cost standpoint. Businesses must pay attention to shifts on a worldwide scale, especially in large markets such as China. 

Wealth inequality affects businesses in many ways. Banks and financial institutions, whose reputations were damaged after the recession, are now competing with new models of lending that are more feasible for those who may not have had the opportunity to build strong credit and accumulate savings. Peer-to-peer lending services such as The Lending Club, Prosper Marketplace, and Kabbage strive to cut out the middle man and offer more affordable loans to small businesses that wouldn’t ordinarily qualify. Interest rates are generally lower, and the application process is less cumbersome. Corporate giants such as Amazon and PayPal are also getting into the loan business by offering capital to business owners who sell through their platforms. Crowd-funding, too, has become a large source of capital for small businesses through online platforms such as GoFundMe and Kickstarter, eliminating the need to apply for traditional loans. Entrepreneurs and business owners can look to these alternative sources to obtain the capital they need to start or continue operations. 

Businesses should also be aware of the needs of their employees that are not being met by wages alone. Incomes have risen, but most of the gains have occurred in upper income brackets. Furthermore, when adjusted for inflation, wages for the majority of Americans remain much lower than needed to keep up with rising costs. They thus look to their employers to provide benefits such as health insurance, childcare, professional development, and wellness programs. Many of these services are unaffordable without employer support. While job seeking, many people place more importance on these benefits than on the salaries themselves. Companies that strive to attract top talent should ensure their employees’ requirements are being met.

Businesses are also dealing with the repercussions of older workers who, under different financial circumstances, might be preparing for or already in retirement. For years, business owners and economists have anticipated the aging of the 74.9 million Baby Boomers, who are currently between the ages of 51-70. This large-scale retirement was predicted to open up many jobs for new employees, but also cause a slowdown in productivity and economic growth as the most experienced, highest-level employees transition out of the workforce. However, millions of Baby Boomers do not have the accumulated wealth necessary to retire by age 65. The losses of the recession, combined with stagnant wages and a reluctance to make risky investments, have kept many Americans from reaching long-term financial goals. Furthermore, worries over the capacity of Social Security to support the large number of Baby Boomers, who will live longer than any previous generation, have prompted many to stay in the workforce past traditional retirement ages. 

To cope with these changes, businesses must implement policies to accommodate older workers. They should strive to combat ageism in the workplace and provide support to keep older employees up-to-date. Offering financial planning and healthcare services to older employees can help ensure a successful transition to eventual retirement.

Those who have left the workforce may not be financially prepared to finance their retirements, which will impact the economy as a whole. Financial issues associated with retirement will remain prevalent, as those in younger generations have less discretionary income to put into retirement savings. At the same time, costs associated with retirement continue to rise.  Companies in industries such as health care, insurance, retirement facilities and destinations, and financial advisors should be aware of the lack of wealth that may affect their customers.

Classroom Implications

Students may not have an accurate understanding of the way income and wealth are distributed among U.S. households. They should begin to pay attention to wealth patterns and how they impact both individuals and businesses. Students who want to attend college should carefully consider job opportunities after college and what wages they would expect for those jobs. They might want to consider career fields heavily impacted by the large-scale retirement of Baby Boomers. 

Students who want to start their own businesses should be aware of the lending environment, including alternative ways to obtain capital if traditional loans are not an option. Furthermore, students should understand the benefits and services they should seek from future employers in addition to wages. 

Although retirement probably isn’t at the top of students’ thoughts, they need to plan for their long-term future. Ask students how they will support themselves for the 30-40 years after retirement. Point out that Social Security income will not be sufficient by itself. They will need to save and invest to be comfortable in retirement. Currently, the stock market’s annual rate of return has dropped to 5% rather than the historical average of 10% prior to the Great Recession. This means that Millennials need to start saving for retirement as early as possible and saving more from each paycheck to be able to pay their retirement expenses including medical care and long-term care after retirement. Have students research how much they need to be saving to afford retirement. (The current estimate for Millennials is 22%).

In general, students should be aware of the ways wealth impacts retirement and the effects on the economy if workers are unprepared.  Students should also be aware of the ways in which other countries’ economies can impact market demands across the globe and can impact production.