Blogs | April 11, 2012

Shall we play The Generation Game?

Should the generation paying higher fees for university and struggling to get on the housing ladder resent the prosperity of their parents and grandparents?

It looks as if they have good reason to if reports from Britain are indicative of the debates elsewhere. But before family tensions boil over, let’s weigh the economic pros and cons of growing up in the modern day.

But mum, weren't things easier for you? 
Typically, 40-somethings are depicted as sitting on large tax-free profits from high house prices – the same high prices that are keeping young people out of the housing market and compelling them to pay high rents.
And in the UK, fee increases will see young people having to pay up to £9,000 a year for a university education which baby boomers got for free. The young also face the difficulty of finding a first job at a time of mass unemployment – but this is a cyclical problem rather than a generational one; it was no fun finding work in the early 80s either.
The fact is, though, that youngsters have less to complain about than it seems.

Roof vs risk 
Take house prices first.
Yes, these have risen in many developed markets a lot since the early 90s. But for a lot of people, these gains are no more than you’d expect for holding a very risky asset. They have not been a free lunch.
And the very fact that prices are so high that young people can’t afford them tells us that they could fall. A glance at the US warns us of this. Prices there are 33.9% below their peak – and more than 50% below in some cities – according to an influential index. UK house prices are only 11.9% down from their peak. If prices continue falling, today’s 20-somethings won’t be so hard-done-by.

Pay a premium (but earn one too)
But surely, there is more reason to complain about the cost of university?
In one sense, yes.
Not only do the young have to pay fees, but they also face a lower return to having a degree than older graduates enjoyed. Researchers at the University of Swansea estimate that male graduates born in the 1940s earned 26% more than workers of the same age with only pre-university school levels. But for those born in the 1980s, the graduate premium was only 15%: there’s a contrast here with the US, where NBER research shows the graduate premium has steadily risen.
However, this doesn’t mean things are all tough for the UK’s young people.
For one thing, many more of them can enjoy the higher earnings that come from having degrees; in the early 60s, fewer than 10% of people went to university whereas almost half do now. And for another thing, although the graduate premium is lower in percentage terms, it’s just as high in absolute ones. In 1969 a reasonably skilled non-graduate male worker in London would do well to earn much above £30 a week. That’s £385 in today’s prices. But now, ONS figures show he could get over £700 a week.
Economic growth has raised real wages.
A 15% premium over £700 a week is worth more than a 26% premium over £385. And these figures might understate the advantage young people today have over their counterparts in the 60s.
Back then, no amount of money would have bought you an iPod, mobile phone, Wii or internet access.

More or less
The point of all this is simple. It’s hard to say whether today’s 20-somethings are better or worse off than their counterparts of years ago.
Yes, they face higher housing costs and tuition fees.
But they also have higher wages and much more access to technology.
For what it’s worth, then, here are three pieces of advice for them.

  1. Don’t get hung up about intergenerational injustice. Even if it does exist, there’s not much you can do about it unless you invent time travel.
  2. Don’t worry about not being able to get on the “housing ladder”. Not owning a house might be a good thing for the next few years.
  3. Just as the 60s and 70s are very different from now, so too will be the 2030s and 40s – and in ways we cannot predict. The jobs you’d like to do (such as in the media?) might not exist then, but others probably will. The trick is to be in a position to take advantage of the unforeseeable opportunities the future will provide. And unless you have a very good alternative, this probably means going to university if only for the signalling and networking opportunities it offers.

Chris Dillow
Chris Dillow

Investors Chronicle writer and economist