Youth left behind: The real story of the recession

 

Young people have been the worst-hit victims of the recession. © Gaia Saviotti

The recession and its aftermath have unsurprisingly hit the living standards of UK households hard. According to the latest official government statistics, median income in 2012–13 was nearly 6 per cent below its level in 2009–10. Despite the economic recovery, slow earnings growth and benefit cuts mean we can be pretty sure that incomes will remain below their 2009–10 peak for a while yet. On average, the sizeable impact of the recession is clear–but are we all in it together?

In one sense, yes. By 2012-13, overall income inequality was substantially lower than it had been before the recession. Indeed, it was back at 1990 levels. This was mainly because those in work saw big reductions in real earnings, while those out of work were, on the whole, protected by benefits rising in line with prices. Admittedly, falling mortgage interest rates have, on average, been of more help to those with higher incomes. And income inequality is likely to be rising again, now and in the near future, as cuts to the social security benefits for those of working age gather pace. Overall, however, this is not a period that is likely to be remembered for a great change in inequality between rich and poor.

But in another sense, the pain has been far from evenly felt. Our latest IFS report into living standards, poverty and incomes in the UK shows that, while pensioners have come through the recession broadly unscathed, young adults in their twenties have seen the largest falls in incomes. The real story of the recent recession is the divergent experiences of young and old.

In the case of pensioners, the improvement in their fortunes continues a long running trend. Indeed, the catch-up of the living standards of pensioners over the last couple of decades has been truly astonishing. In 1992, average income was 20 per cent lower for pensioner households than the rest of the population. By 2012–13, it was 5 per cent higher. These dramatic rises in income have led to large falls in poverty. Between 2007-08 and 2012-13, the official measure of relative pensioner poverty fell by over a quarter. Once housing costs are taken into account, pensioners are now less likely to be in poverty than the rest of the population.

The contrast with the fortunes of young adults is striking. Median income among 22-30 year olds fell 13 per cent between 2007–08 and 2012–13 after adjusting for inflation, compared to a fall of 7 per cent for 31-59 year olds. This income fall for young adults is entirely explained by lower employment rates, lower hours worked and lower hourly wages. Employment rates for young adults have fallen from 75 per cent to 71 per cent since the recession. Remarkably, the employment rate for 31-59 year olds had recovered its 2007-08 level as early as 2012–13. Median weekly pay fell more than twice as fast between 2007-08 and 2012-13 for those aged 22-30 as for those aged 31-59. This is partly due to a bigger rise in part-time work among young adults; but their hourly wages have also fallen much faster than those of older workers.

The current generation of young adults has the highest levels of formal education ever, and yet lower earnings than those born ten years earlier had at the same age. Whether these poor labour market outcomes prove temporary or persistent for this generation is of paramount importance, and of course those prospects are highly uncertain at this stage. One trend that does look likely to prove permanent is lower home ownership. People in their mid-20s are less than half as likely to have bought a home as were previous generations by the same age. Their rates of home ownership are unlikely ever to catch up.

In comparison to the great uncertainty for young adults, the future looks pretty good for older individuals. Higher employment rates, driven in part by improvements in health and increases in the state pension age, mean we expect to see rising incomes at older ages. And in retirement, they are likely to enjoy higher private pensions, alongside a “triple-locked” state pension.

The changes in the distribution of resources we are seeing now may be much more subtle than the big rise in inequality between rich and poor that we saw in the 1980s. But the growing divergence between the generations may have equally profound long-term consequences.