Will Generation Z be better off than their parents?

It was always presented as the American dream – each generation being better off than the previous one as living standards gradually rose.

For years this was driven by the march of technology and more people working in better-paying jobs – for example, from farming to manufacturing and latterly to high tech service jobs.

But somewhere along the way something seems to have gone wrong, and that is a key factor in today’s politics worldwide, with increasing numbers disenchanted.

New research published by the Federal Reserve Board, the US central bank, crunches the numbers – and this also provides some valuable perspectives on Ireland, where research has already pointed to the challenges faced by younger generations in recent years.

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1. From the Lost and Silent Generations to Millennials and Generation X

The study published by the Fed is a comprehensive piece of work, covering households in seven generations starting from those born between the mid-1880s and 1900 to Generation Z, born between 1997 and 2012 – with a full analysis of 36 to 40-year-olds in five of these generations.

It tries to deal with the contrast between popular perceptions that people born in more recent years have been unlucky economically, compared with surveys of these groups which find many are more positive about their prospects.

The authors use a comprehensive measure of income that adjusts for taxes and includes both cash earned and financial transfers, mainly from the government. It also adjusts for inflation.

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The figures inevitably cover the groups as a whole – as opposed to looking specifically at how people did relative to their parents.

The bottom line of the research is that each generation in the US is, indeed, on average better than the one that came before, but that the rate of improvement has slowed significantly over the years.

Millennials, many of whom who will have reached the age studied in the research in recent years were 18 per cent better off than the previous Generation X (born between 1965 and 1980), who were in turn 16 per cent ahead of the Baby Boomers (born 1945 to 1964). However, these rates of increase were behind Baby Boomers themselves, who enjoyed a 27 per cent gain, and the so-called Silent Generation, who had a 34 per cent gain.

So the finding is that the American dream lives on, even if it is looking a bit shakier. There is some interesting detail. First, for Millennials, a key reason for improvement during their 20s is that they are more likely to be living at home with their (at that stage of life) better-off parents.

The bottom line of the research is that each generation in the US is, indeed, on average better than the one that came before, but that the rate of improvement has slowed significantly over the years.

Household formation ages have risen, due to social factors and, of course, the high prices of housing in some areas. In 2022, 61 per cent of people in the US aged 35 to 44 owned a home, down from 66 per cent in 1989.

The researchers say that this is one likely reason why more recent generations feel they are stuck and that living standards are stagnating.

And while the inflation measure used in the data to judge the real level of income increases does include an adjustment for housing prices and rents, it is pointed out that in some big US cities these cause significant difficulties for younger people.

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2. Why each generation has improved – one vital factor

Economic progress and increased productivity through the 20th century clearly lifted incomes and living standards. But another factor is also vital – the hours worked by a household.

Slower growth for Generation X and Millennials has come from a stalling in a trend of increased hours at work, which had helped to drive the increased living standards of earlier generations.

US labour force participation at prime working age in the late 30s rose from 70 per cent in the late 1930s to 83 per cent when Baby Boomers were that age, roughly around the end of the last millennium.

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However, in more recent years it has stalled around 82 per cent. While this may be influenced by the decisions of individual employees about how long to work, the key factor here is female labour force participation and the rise of the double-income family. The slowing in labour force participation growth has been key to slowing improvement in overall living standards.

Perceptions are also clearly affected by the income of individuals compared with their own parents – a measure of the level of mobility in society. Earlier US research showed while around 90 per cent of 30 year-olds born in the 1940s had income that exceeded their parents, this was true for just over half of 30-year-olds born in the 1980s.

The researchers for the Fed paper say that this is broadly in line with their work, but that their research indicates that intergenerational progress is no longer slowing.

And it will be interesting to see how the numbers add up for the zoomers – Generation Z –, many now younger adults, facing a strong US jobs market but also, in many cases, similar housing challenges to Millennials.

3. What are the lessons for Ireland?

Intergenerational equity is clearly a hot topic in Ireland, too, largely but not entirely related to the jobs market.

By international standards, while house prices here are high in urban areas, the rental crisis shows Ireland is clearly out of line internationally, delaying household formation and triggering other problems through the housing market.

Those born in the 1980s and 1990s are the first covered by the data - which goes as far back as those born in the 1940s - not to experience consistently higher real earnings than those born in the previous generation.

Research by the Economic and Social Research Institute (ESRI), published in 2021 by economist Barra Roantree and colleagues showed, after adjustment for inflation, average weekly earnings for workers born in the 1990s were no higher than for those born in the 1960s at age 20 to 22 and had by age 26 yet to surpass that of either the 1970s or 1980s cohort.

Roantree puts this in the context of a more widespread stagnation in earnings since the financial crash after 2008, with average earnings for those born in the 1980s no higher from age 25 to 35 than for those born in the 1970s. This was despite those born in the 1980s starting out in the jobs market on average with higher earnings than earlier generations.

Those born in the 1980s and 1990s are the first covered by the data – which goes as far back as those born in the 1940s – not to experience consistently higher real earnings than those born in the previous generation.

As the research noted, problems in the housing market, and notably high rental costs, are also affecting younger people, who are on average paying a higher proportion of their income on housing.

So the same trends are evident in Ireland as in the US, though on the basis of the ESRI findings more recent generations have seen earnings stall, while in the US the Fed research suggests a slower rate of increase, which seems to have bottomed out in recent years. (Other US research shows less favourable results in recent generations due to the use of different data, for example in adjusting for inflation or accounting for government transfers).

Two other factors are worth looking at to try to understand what is happening in Ireland. One is the extraordinary growth of employment in Ireland over many years, albeit interrupted by the financial crisis and – briefly- by Covid -19.

This has generated significant new economic activity and national income in Ireland, with new employees provided by young people entering the jobs market and by significant immigration. Even looking at the period of the last two census – 2016 and 2022 – total employment rose from 2.158 million to 2.555 million (and has since topped 2.64 million).

So in Ireland, as well as the US, more working hours in a household has been a key to rising living standards.

Second, this has delivered for Irish households, with a 12 per cent rise in real household disposable income between 2016 and 2022, according to a CSO analysis. But there is a key point here which relates back to both the Fed paper and the ESRI research. It is that the disposable income of individual employees increased by just 1 per cent on average – wages growth, on average, just fractionally exceeded prices.

So the significant income gains accrued to households where more people were at work. Given the large rise in female participation in the jobs market over recent years – continuing in 2023 – this was clearly a factor.

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One-income households were turning into two-income households, or 1½ incomes if the second partner took up part-time work. In other households a younger person could have entered work, or an unemployed person could have returned to the workforce.

So in Ireland, as well as the US, more working hours in a household has been central to rising living standards. In both countries this has been a key way that a strong jobs market has translated into better real incomes.

For the zoomers to be better off will require the jobs market to remain strong and some solutions to emerge to reduce the burden of housing costs.