The FT’s article on the changing balance of incomes between the young and old was one of its most-read this week. Trawling through half a century’s income statistics, they found a reversal in the fortunes of the young and old. The median income for a young people in 1961 would have made them relatively affluent while the median income for someone between 65 and 70 would have been in the bottom third. Today, that position has almost reversed.
In 1961, those earning the median income after housing costs for a 20-25 year old would have been at the 66th percentile in the income distribution. Their 2012 counterparts would only be at the 37th percentile.
The story fits in well with the zeitgeisty intergenerational conflict narrative.
The pattern of gains for the old at the expense of the young is repeated for rich and poor alike, but it is strongest for average and poorer families.
And the gap between generations is wider for those on middle and lower incomes.
I wonder if our ancestors would find today’s income distribution so strange though. They would expect the young to earn less. For most of our history, age and income hierarchy were closely aligned. As recently as the early 20th century, young people were not expected to earn more than older people. They progressed up through the ranks of whatever occupation they were in, improving their skills and probably reaching peak earnings somewhere around 40. The outlandish bit of all this is the income distribution in the 1960s. The idea that the average 20-25 year old would earn more than two-thirds of the rest of the population would have been thought absurd.
Indeed, a lot of people thought it was absurd in the 1960s. I once saw a documentary on the youth of the 1960s and the Mods and Rockers. It went into some of the socio-economic factors behind the growth of these youth movements. There was an interview from the early 1960s with a man and his daughter. The daughter was earning a lot more money as a secretary than her father was as a manual worker. He was clearly proud of his daughter yet, at the same time, slightly bemused that this should be the case. The increase in young people’s earnings and the behaviour and attitudes that came with it were behind much of the moral panic about the Mods and Rockers. Not only were they tearing around the country on motorbikes but the cheeky little blighters were earning more money than their parents to boot. And after we’d fought a bleedin’ war, n’ all….
As Chris Giles and Sarah O’Connor say in their piece:
Those born in the 1940s belonged to a particularly lucky generation. On average they were relatively rich as young adults and remain relatively rich today.
The sharp-eyed among you will already have worked out that the 20-25s of the early 1960s are today’s recently retired. They lived through an extraordinary time when the economy grew at a rate never seen before and when twenty year olds could out-earn their parents.
But something else happened during that period too. Not only did the economy grow but those on middle incomes got a bigger share of the spoils.
Wages as a percentage of GDP reached a peak in the 1970s. For a brief period, most of the benefits of Britain’s economic growth went to employees.
Chart by Chris Dillow
At the same time, middle earners were getting a larger share of those wages. The 60s, 70s and early 80s were a good time to be earning the median wage. Not only did you benefit from a growing economy, you got a higher share of the proceeds too. Those on middle incomes got a bigger slice of a bigger pie than at any time before or since.
It was during this period that today’s recently retired were in the prime of their working lives. Many were able to buy property, which was still cheap by today’s standards, and have increased their wealth by doing so. A lot of people had generous final salary pension schemes and enough disposable income to invest to top them up.
Since the 1980s, though, wages have fallen as a percentage of GDP and the proportion of income going to those in the middle has fallen too.
Source: Chartbook of Economic Inequality
A median income is a lot further from the average than it was in the 1970s. Being a middle-earner isn’t such a good deal these days.
And that’s the problem for the next generations. The Baby Boomers are relatively affluent because they lived and worked through a period when the spoils of postwar growth were distributed more widely and equally. Subsequent generations will not be as rich because they didn’t. A greater share of income is being taken by fewer people, housing is being priced out of many people’s reach and the occupational pensions are disappearing.
But by framing these differing fortunes as a generational conflict, we are missing something. The young aren’t poor and the old rich because the old are snaffling the income and benefits from the young. The old are richer because they lived through a time when the country’s wealth was distributed more evenly, so more people had more. The inequality between generations is a symptom of the wider rise in inequality since the 1980s, the shifting balance of power in the workplace and the fall in wages over the last decade. The average youngster will have a smaller share of wealth than the average oldster did because they are living through times that are less generous for the average worker. Intergenerational inequality is really just another story about falling incomes, less secure employment and job polarisation.