Tong Kooi Ong

Consistent downtrend in income mobility … a gloomy future ahead?

Anaemic wage growth is a global phenomenon – and one that has stumped central bankers and economists.

Economics 101 teaches us that when unemployment drops, employers competing for a smaller pool of workers will have to pay higher wages and that will eventually push up inflation.

This inverse relationship is the core of many economic models, including the Phillips curve, which the US Federal Reserve embraces as part of its policy decision-making. But over the past two decades, actual economic statistics suggest that this correlation has broken down.

In the US, unemployment rate is now hovering near the lows last seen in 2000 and further back, in the late-1960s. In Japan, there are 1.6 openings for every job seeker. Yet wage gains have been cool, so far.

Many plausible explanations have been put forth as to the reasons why this is so.

Lengthening life span and thereby, longer productive work life and delay in retirement means fewer opportunities for the younger generations to move up.

Politicians often use globalisation and immigration as the whipping boys for stagnant wages.

Digitalisation and technology has diminished individual worker bargaining power under the threat that automation, artificial intelligence (AI) and robotics can, and will, replace human jobs.

More recently, the rise of the gig economy – increasingly a lifestyle choice for millennials – creates a readily available pool of talent outside of the formal workforce that companies can tap into for outsourcing and to tide over peak requirements. Often, retirees join this growing segment of freelancers, part-time and temporary job seekers where wages are generally lower.

Whilst the issue and problems associated with anaemic wages may have come to a head after the global financial crisis, a study undertaken by academics from Stanford University, Harvard University and University of California Berkeley titled The Fading American Dream: Trends in Absolute Income Mobility Since 1940 (reference: Equality of Opportunity Project) indicates that this phenomenon has been happening for far longer. (See Chart 1)

The research paper studied and compared the income distributions for children and their parents at the age of 30.

How to read the chart:
  • The x-axis is the year in which the child is born. For instance, a child born in 1940 would be 30 years old in 1970 and a child born in 1985 would be the same age in 2015.
  • A comparison is done on how much the child and his/her parents are earning at the age of 30. The study covers a 50-year period from 1970 to 2015.
  • The y-axis denotes the rate of absolute upward income mobility, which is defined as the percentage of children that earn more than their parents.
  • Sensitivity analyses were also done using different price deflators, income definitions and age as well as subgroups by gender and states, etc., to test the robustness of the results. 
  • The findings are startlingly sobering. In the 1940 birth cohort, the average rate of absolute mobility is 92%. This means that nearly all children grew up to earn more than their parents regardless of their parental income. But for those in the latest 1984 cohort, this percentage has fallen sharply – only 50% grew up to earn more than their parents.

In fact, the rates of absolute income mobility were in a consistent downtrend over the last 50 years. The steepest drop came between the 1940 and 1964 cohorts, stabilised briefly for those born in the late-60s and early-70s before resuming a steady decline.

The obvious question is why? The study suggests two plausible reasons.

One, the rate of decline is due to a slowdown in the pace of economic expansion in the US (see Chart 2) over the same period.

The steepest drop in income mobility (between the 1940 and 1964 cohorts) matches slower US GDP growth rates, which averaged only 3% p.a. in 1970-1994, down from about 4.4% p.a. in 1950-1969.

Stabilisation in the rates of income mobility for those born in the late-60s and early-70s corresponds to the economic boom in the late 90s and turn of the century, before the dot-com bust.

The decline in income mobility resumed after this brief period, which again mirrors weak GDP growth rates. From 2000-2004, the US grew by just 2.7%, on average, and only 0.9% between 2005 and 2009. As we are well aware, the recovery since the global financial crisis, though spanning more years, was tepid by historical yardsticks (2.2% average annual growth from 2010-2017).

According to the study, counterfactual scenarios indicate that lower GDP growth only accounts for 29% of the decline. The study found that the growing inequality of distribution of growth in the country was, in fact, the larger reason behind the drop in income mobility.

To summarise the two main findings from the published paper:
  • Absolute income mobility has fallen across the entire income distribution, with the largest declines for families in the middle class and
  • Most of the decline in absolute mobility is driven by the more unequal distribution of economic growth in recent decades rather than the slowdown in GDP growth rates. The rise in inequality and the decline in absolute mobility are closely linked. 
  • The study concluded, “Achieving rates of absolute mobility above 80% under today’s income distribution would require sustained … real GDP growth above 6.4%, well above the historical experience of the United States since World War II”.
Although this study is based on developments in the US, where data is most readily available, the phenomenon is observed worldwide.

Stagnant wage growth, especially for the low-middle class, is of critical importance and has wide implications for governments and society. Indeed, we have witnessed global political instability and existing establishments swept from power by the rise in populism.

The consumption boom underpinned by growing middle class (first in developed nations, then in emerging countries) has been a key driver for economic growth in the past. Lower-middle income households typically consume a higher proportion of their disposable incomes while higher income households tend to save-invest more.

But widening wealth disparity and inability to move up the income ladder is threatening to upend this – by eroding spending power and suppressing aggregate demand growth. Unaddressed this trend will eventually be a drag on the global economy.

The evidence does paint a gloomy picture and augurs badly for the future of global economic growth. But is this necessarily so? What can policy makers do to improve the livelihood and betterment of the next generation? We will address the potential solutions in future issues.

Stocks in the Global Portfolio lost 1.4% in the past one week. This pared total returns to 4.7% since inception. The portfolio is still outperforming the MSCI World Return index, which is up 3.4% over the same period.

Meanwhile, the Malaysian Portfolio fell by about 1.1% last week, paring total returns since inception to 61.5%.

This portfolio is outperforming the benchmark index, FBM KLCI, which is down 2.8%, by a long way.

We disposed of our entire holding in Pantech, realising a small loss of RM860. The company reported a good set of earnings in its latest 1QFYFeb2019. However, management guided for lower revenue – by about 20% for the remaining months of the FY19 – due to anti-circumvention determination on Malaysia by the U.S. Department of Commerce for imports of carbon steel butt-weld fittings from China. Pantech has engaged a legal counsel to challenge the decision. Given the uncertainties of a resolution, we decided to sell the stock.

Performance Comparison Since Inception (%)
  • Tong's Value Investing Portfolio
SCGM BHD11,0661.74219,273.71.41015,603.1(3,670.6)(19.0%)
AJINOMOTO (M) BHD1,50012.27818,417.521.80032,700.014,282.577.5%
PANASONIC MANUFACTURING MSIA60028.63717,182.039.00023,400.06,218.036.2%
KERJAYA PROSPEK GROUP BERHAD11,0001.02011,225.01.54016,940.05,715.050.9%
Y.S.P.SOUTHEAST ASIA HOLDING10,5002.41325,340.02.86030,030.04,690.018.5%
LUXCHEM CORPORATION BHD16,5000.71711,825.00.65510,807.5(1,017.5)(8.6%)
FORMOSA PROSONIC INDUSTRIES18,0001.54027,720.01.34024,120.0(3,600.0)(13.0%)
HONG LEONG INDUSTRIES BHD2,0009.27618,551.011.10022,200.03,649.019.7%
WILLOWGLEN MSC BHD19,9000.5009,950.00.52010,348.0398.04.0%
HOCK SENG LEE BHD14,5001.52022,040.01.38020,010.0(2,030.0)(9.2%)
MALAYAN BANKING BHD3,00010.50031,500.09.84029,520.0(1,980.0)(6.3%)
MAH SING GROUP BHD19,0001.07020,330.01.24023,560.03,230.015.9%
ECO WORLD DEVELOPMENT GROUP BERHAD15,2001.23518,772.01.23018,696.0(76.0)(0.4%)
Shares bought
No transaction.
Total shares held252,126.2277,934.625,808.410.2%
Shares sold
PANTECH GROUP HOLDINGS BHD43,0000.58024,940.00.56024,080.0(860.0)(3.4%)
Cash Balance44,999.6
Realised Profits / (Losses)97,125.8
Change since last update Jul 19, 2018
Portfolio Returns Since Inception200,000.00322,934.2122,934.261.5%
Portfolio Returns (Annualised)16.1%
Portfolio Beta0.589
Risk Adjusted Returns Since Inception104.4%
Performance ComparisonAt Portfolio StartCurrentChangeRelative Portfolio Outperformance
FBM KLCI1,829.71,778.1(2.8%)64.3%
FBM Emas12,700.412,581.8(0.9%)62.4%
*Current price is as at August 2, 2018.
*Portfolio started on Oct 10, 2014 with MYR200,000.
*This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks.

CLASSIC SCENIC BHD26-Jan-1613-Jul-174,0001.4135,651.31.8157,260.01,608.828.5%
MIKRO MSC BERHAD01-Dec-1627-Jul-1742,0000.33113,920.00.54522,890.08,970.064.4%
CLASSIC SCENIC BHD01-Dec-1627-Jul-174,0001.4135,651.31.7907,160.01,508.826.7%
PANASONIC MANUFACTURING MSIA21-Jan-1627-Jul-1740026.12510,450.037.10014,840.04,390.042.0%
ELSOFT RESEARCH BHD30-Mar-1724-Aug-178,0001.84414,750.02.65021,200.06,450.043.7%
JOHORE TIN BERHAD - WA 12/1704-May-1724-Aug-1717,0000.65511,135.00.68011,560.0425.03.8%
FOCUS LUMBER BERHAD03-May-1730-Aug-176,0001.6609,960.01.5309,180.0(780.0)(7.8%)
WILLOWGLEN MSC BHD23-Nov-1630-Aug-177,0000.7685,377.01.43010,010.04,633.086.2%
WILLOWGLEN MSC BHD23-Nov-1628-Sep-177,0000.7705,377.01.1808,260.02,883.053.6%
LII HEN INDUSTRIES BHD14-Dec-1628-Sep-175,0002.82014,100.03.72018,600.04,500.031.9%
COMFORT GLOVES BERHAD28-Aug-1708-Dec-1725,0000.96024,000.00.93023,250.0(750.0)(3.1%)
JOHORE TIN BHD08-May-1708-Dec-179,0001.60014,400.01.18010,620.0(3,780.0)(26.3%)
THONG GUAN INDUSTRIES BHD12-Dec-1608-Dec-175,0004.24321,215.04.10020,500.0(715.0)(3.4%)
KERJAYA PROSPEK GROUP BERHAD12-Jan-1715-Mar-1811,0001.02511,280.01.54016,940.05,660.050.2%
KERJAYA PROSPEK GROUP BERHAD - WARRANTS B 2018/202308-Mar-1815-Mar-183,0000.0000.00.330990.0990.0-
LUXCHEM CORPORATION BHD30-Aug-1715-Mar-1816,5000.73212,072.50.72011,880.0(192.5)(1.6%)
WILLOWGLEN MSC BHD14-Dec-1722-Mar-1820,0001.01020,200.01.26025,200.05,000.024.8%
MUAR BAN LEE GROUP BERHAD26-Oct-1722-Mar-1813,5001.24016,740.01.17015,795.0(945.0)(5.6%)
CHOO BEE METAL INDUSTRIES BHD07-Sep-1716-May-188,0002.19017,520.02.44019,520.02,000.011.4%
CHOO BEE METAL INDUSTRIES BHD07-Sep-1721-May-188,0002.19017,520.02.30018,400.0880.05.0%
SUPERLON HOLDINGS BHD01-Dec-1721-May-186,0001.1757,050.01.5509,300.02,250.031.9%
OKA CORPORATION BHD14-Dec-1728-Jun-1812,0001.54118,488.01.27015,240.0(3,248.0)(17.6%)
SUPERLON HOLDINGS BHD01-Dec-1728-Jun-186,0001.1757,050.01.2107,260.0210.03.0%
WILLOWGLEN MSC BHD14-Dec-1728-Jun-181000.50050.00.54054.04.08.0%
PANTECH GROUP HOLDINGS BHD17-May-1802-Aug-1843,0000.58024,940.00.56024,080.0(860.0)(3.4%)
A Note to Readers

It is my pleasure to share with you my Value Investing Portfolio. However, I must emphasize that it is by no means a recommendation or a solicitation or expression of views to influence you to buy or sell any stocks. I am just sharing openly on what I am doing with my stock portfolio.

Further, I like to remind all investors that investing is not just about the profits or returns. You will inevitably suffer stock losses too. You need to understand your own investment objective, risk appetite and the amount of loss you can afford to bear. So, while many investors talk only about absolute returns, I am also sharing the computed risk-weighted returns of my portfolio.

Tong Kooi Ong