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A new and exasperating form of debate has taken hold in recent years. One group of people says the economy isn’t working for them, that they feel squeezed or dissatisfied with their lot. Another presents a set of charts proving them wrong. The line goes up; how can you be disgruntled? Typically the things discomfiting the first group are different from the things shown in the chart, and nobody ends up satisfied.
The classic example is inflation. Price spirals are uniquely psychologically and societally destabilising, with research showing they reliably result in social strife even if earnings keep pace with prices. Pointing to steady real wages misses the point when the complaint is about rising nominal prices.
Another example is the question of whether today’s young adults are really worse off than the generations that came before them. They certainly seem to think so. But it’s frequently pointed out on both sides of the Atlantic that they actually earn more than their parents did at the same age. Case closed.
Or is it? I obviously have no problem with the idea of using charts and evidence to settle a debate, but in this instance I think people are using the wrong charts. A deeper appreciation of what actually shapes people’s satisfaction with their work and life would lead us to different evidence — evidence that firmly supports the disgruntled young adult case.
The key here is that what shapes people’s satisfaction with their place in the economy isn’t so much their pay cheque as where they sit relative to others like them both today and in the past. As Andrew Clark and Andrew Oswald showed many years ago, this aspiration gap, between someone’s position in society and the one they could reasonably have expected given their age and education level, reliably drives discontent.
This is at the heart of the debate about whether young adults are getting a raw deal because, over recent decades, we have unwittingly engineered a society and economy in which the aspirations of every subsequent generation have been raised while their ability to realistically achieve them has not. Specifically, the expansion of higher education, while well intentioned and clearly beneficial in many aspects, has upset the balance between expectations and outcomes.
I have written before about the erosion of the graduate wage premium, but the dynamic I’m talking about here is a much broader phenomenon. As more and more people go to university, the average graduate shifts from being among the economic elite to being the norm, placing them much further down the socio-economic pecking order than graduates of yesteryear. They were told putting in the years of hard work would bring with it not only a good job and wage but a certain status in society; most have found out it hasn’t.
The result is that even though today’s young adults, and graduates in particular, are over-represented in the top quartile of the earnings distribution, they are also far more likely to be at the bottom than the top for earnings relative to reasonable expectations. In both the UK and US, even though only 10 percent of graduates are in the lowest earnings quartile, one in three is in the bottom bracket for earnings relative to expectations.
Less appreciated is that the expansion of higher education has also lowered the relative status of non-graduates. As a larger share of youngsters go to university, those who don’t are an ever more disadvantaged slice of their generation. Their position in the rankings also falls, both today and relative to their non-graduate parents. To put some numbers on this, the average thirty-something university graduate in the UK today sits at the same rank of the earnings ladder as the average high school graduate did in 1995 and the average high school graduate today sits at the same rank as someone who never completed school in 1995.
The tendency to reach for the nearest and easiest numbers to debunk discontent is understandable. But, more often than not, feelings have a basis in evidence, and knowing the greater importance of income relative to aspirations squares the circle between pay cheques and perceptions. Are today’s twenty- and thirty-somethings earning more than their parents did at the same age? Yes. But their relative position in society is lower than their parents’ was, and their position relative to their peers and expectations is significantly lower. Since it’s the latter that drives satisfaction, young adult malaise should come as no surprise.
[email protected], @jburnmurdoch