Cross countries: international comparisons of intergenerational trends

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Executive Summary

In this report – the fifteenth for the Intergenerational Commission – we explore the extent to which the UK’s generational living standards challenge is replicated in other high-income economies, focusing on trends in household income and experiences in the labour and housing markets.

Public concern about the living standards of young adults compared to those of their parents’ generation is evident across high-income countries, and our findings indeed point to many areas in which the generational challenge appears shared. These range from ageing populations driving fiscal pressures; to a financial crisis affecting younger workers in particular; to housing cost pressures shifting increasingly towards households in working age.

Overall, the pace of generation-on-generation growth in household income – a common benchmark of day-to-day living standards – has slowed across high-income countries. It is common for millennials (born 1981-2000) who’ve already reached their early 30s to have experienced little or no income improvement on generation X (born 1966-80).

However, our findings also mark the UK out in terms of the degree of reversal in young adults’ fortunes. With the partial exception of Spain, the UK is the only advanced economy in which large generation-on-generation progress on both household income and home ownership rates was a feature of the 20th century but has failed to materialise for younger generations so far in the 21st. While young adults in other high-income countries face many challenges that are not seen in the UK, not least those in southern Europe where youth unemployment has rocketed, this generational boom and bust is arguably what has driven the recent salience of UK intergenerational debates.

Many of the contextual factors underpinning the UK’s intergenerational debate are observed across advanced economies

Pessimism about the living standards prospects of younger generations is common across high-income countries, with the UK more downbeat than most. Both long-run trends and more recent developments provide the backdrop to this public concern.

In all high-income economies, the post-war baby boom and increases in life expectancy have acted together to bring about population ageing in the coming decades in particular. It’s not just UK politicians who have to face up to the fiscal implications of this shift.

Those in their late teens and early 20s are less likely to vote than older people across advanced economies, with the turnout gap larger in the UK than elsewhere. The evidence suggests that this difference remained sizeable in the UK’s 2017 general election, although turnout increased markedly for a slightly older group in their 30s and early 40s. While age is by no means the only determinant of whether policies appeal to people, turnout patterns combined with fluctuating cohort size suggest some commonalities in the relative political sway of different generations across high-income countries.

It’s not just long-term issues that are shared. The most acute challenge in recent years – perhaps particularly for those at the beginning of careers and so more exposed to shocks – has been the experience and aftermath of the financial crisis. Falling GDP per capita is a common feature (Australia excepted) across the countries featured in this report.

Generation-on-generation income gains have declined everywhere, but the UK is one of a small number of countries to have had then lost them

In common with the UK experience, millennials and members of generation X have real incomes little or no higher than their predecessors at the same age in almost all of the countries covered by this analysis.

Variation emerges, however, when we look at the shape of generational progress over the past half-century. The UK stands out as one of a small number of countries in which large generational income gains for today’s older generations when they were younger have been replaced by a lack of progress for today’s younger generations. It is this reversal in the fortunes of generations alive today that perhaps drives the pessimism with regards young people’s prospects that we have identified in the UK.

In the US and Germany (albeit measured over a shorter time-period), generation-on-generation income gains have been minimal, or non-existent, for a long time. Median income for older members of generation X in the US (those born in the late 1960s) is currently no higher than median income for the youngest members of the greatest generation (those born in the early 1920s) when this group was also aged 45-49. Of course, the level of median income is higher in the US than in all other large advanced economies, but nonetheless this long-standing lack of generational progress stands out, reflecting economic weaknesses that pre-dated the financial crisis and rising inequality.

In southern European economies, the financial crisis has clearly had a large detrimental effect on the prospects of younger generations. It’s not just that the millennials and generation X in these countries haven’t enjoyed as rapid income growth in recent years as their predecessors did, but rather that their income growth has been all but non-existent.

As such, in Spain, Italy and Greece those millennials who have so far reached their 30s have significantly lower incomes than generation X had at the same age. In Greece, this fall isn’t confined to the young – the baby boomers are also currently worse off than the generation that preceded them. The story is Spain is similar to that in the UK, in so far as today’s weakness follows a period in which strong generational income progress was the norm.

Labour market responses to the crisis were far from uniform – younger cohorts in the UK have experienced among the worst pay performance

Household income is shaped by a number of factors, none more important than the labour market. Since the financial crisis, the UK labour market has outperformed expectations in terms of employment but underperformed, particularly for the young, in terms of real earnings growth.

We find that between 2006 and 2014 cohort-on-cohort progress in real earnings went into reverse for all working-age cohorts in the UK and Greece. In 2014, the UK cohort born in the years around 1980 earned 13 per cent less than the cohort born around 1970 did in 2006. In Greece this decline was 25 per cent.

In Spain and Italy cohort-on-cohort falls in real earnings between 2006 and 2014 were smaller than in the UK, some of which is likely to reflect falling labour market participation rates changing the composition particularly of younger cohorts. In the US and France cohorts were earning similar amounts in 2014 to their predecessors in 2006. Meanwhile in Nordic economies, real earnings progress for younger cohorts has continued over the years since the financial crisis.

The other side of the UK’s weakness on earnings is relatively healthy employment performance. The increase in the youth unemployment rate – though significant in the UK – has not been anywhere near as large or persistent as in a number of southern European economies. In these countries youth unemployment is still a very long way from pre-crisis lows, a very different experience to that in the UK where youth unemployment has now returned to similar levels as last experienced in the 2000s.

Looking across advanced economies and comparing changes in youth unemployment rates and youth earnings between 2006 and 2014, we find that experiences were not uniform even among countries with similarly-sized economic shocks. Real earnings for adults aged under 30 fell much further in the UK than in the US or Denmark, despite a similar economic backdrop and similar youth unemployment experiences. The large post-crisis depreciation in Sterling is part of why the UK underperformed on earnings, but it can’t explain why younger cohorts fared worse than older ones. Real earnings fell twice as fast between 2006 and 2014 for the under 30s in the UK than for those in their 50s – a bigger age divide than recorded in any other country with pronounced earnings declines overall.

Structural labour market trends that have borne down on younger cohorts’ pay in the UK are seen in certain other advanced economies

It’s not just post-crisis effects that have held back generation-on-generation earnings progress in the UK. Longer-term trends have also shaped the extent to which our labour market has delivered for young people.

Job-to-job moves – a key mechanism by which workers secure big pay rises, particularly when young – have followed a similar path in the US and the UK over the past two decades. In both countries there is clear evidence of pre-crisis structural declines in mobility, and job moves also fell sharply during the crisis for all age groups in both countries. However, the job mobility rate for young people is still substantially lower than it was in the early 2000s in the UK, whereas in the US it has recovered. This will be acting as a continued drag on pay growth for younger workers in the UK.

The sort of work that young people do has also been changing since long before the crisis. In the UK and some other northern European countries there is evidence of a structural rise in part-time working particularly among young men. The proportion of young men (aged 15-29) working part time increased by 7 percentage points between 1996 and 2016 in the UK, with over half of this increase taking place between 1996 and 2007. Elsewhere, the same trends have been more of a cyclical phenomenon – 80 per cent of the increase in young men working part time in Spain since 1996 has taken place since 2007.

Though some young men might be actively choosing to work part-time and these trends may reflect a more equal sharing of working and family responsibilities across the sexes, UK evidence shows that much of the increase is involuntary and associated with low pay.

A final long-run consideration is the timing of increases in educational attainment. Cohort-on-cohort educational gains, measured in terms of the percentage increase in the proportion of each cohort with a tertiary-level qualification, have slowed in almost all advanced economies. The increase in the share of people with tertiary-level qualifications between the 1960s and 1970s birth cohorts was larger in the UK than anywhere else. The rate of increase between later cohorts is significantly smaller, implying that the boost that educational improvements provide to earnings growth will have shrunk more here than in many other economies.

Older generations in the UK have experienced the greatest historical gains in home ownership, while younger generations are experiencing the largest falls

Since the crisis home ownership rates have declined in a number of high-income countries. But, in the UK and Australia home ownership declines have been longer–standing. This has resulted in a reversal of generational progress starting with generation X in the UK and the baby boomers (born 1946-65) in Australia.

In recent years, generational falls in home ownership rates have been larger in the UK than in other countries where housing was cited as a top concern for young people’s living standards prospects. In the UK, home ownership rates for millennials at ages 25-29 are 27 percentage points lower than they were for the baby boomers when they were the same age. This is compared to a 5 percentage point fall at the same age in Australia.

These large falls have occurred against a backdrop of large generation-on-generation improvements in home ownership for older generations in the UK. The increase in home ownership rates from the greatest generation (born 1911-1925) to the baby boomers, at 29 percentage points, was far larger in the UK than elsewhere. As was the case with incomes, the reversal of progress for generations alive today perhaps underpins perceptions that we face an acute intergenerational challenge here.

Since housing is a major determinant of wealth, falling home ownership has contributed to declines in cohort-on-cohort wealth progress in both the UK and the US. Reflecting the UK’s longer-standing housing problems, these declines started earlier and run deeper in the UK, whereas in the US they appear largely crisis-related.

Underpinning declining home ownership has been large historical increases in house prices relative to people’s incomes – a trend that has occurred across high-income countries. The UK is among the worst performing countries with an average increase in its house price to income ratio of 1.4 per cent a year between 1987 and 2016. A key driver of this outcome has been low levels of housing stock relative to population size and sluggish levels of house-building since at least the 1990s compared to other high-income countries.

As well as affecting longer-term asset accumulation, the key implication of these housing trends in the UK has been increases in the share of income spent on housing at every age for all generations alive today. The UK certainly ranks highly among advanced economies in terms of its housing costs challenge, but is by no means unique. It has the third-highest working age housing cost to income ratio of the countries studied here (behind Greece and Denmark), and is one of a number of countries where housing costs as a share of incomes have increased faster for working age households than retired households since 2005.

Ultimately, this report shows that although generational progress on incomes and housing is lacking in the UK for younger generations, it is something that existed (to varying degrees) in the recent past here and overseas.

Large variations in generational outcomes were evident before the financial crisis, suggesting that, with the right focus and informed policy decisions, generational progress can be achieved. It is to this challenge that forthcoming policy options papers for the Intergenerational Commission will turn.