Comparing the standard of living today with that of the past is crucial to understanding the UK’s economic and social health. In fact, both in our everyday lives and in studies of social sciences, we often assess economic progress by comparing our standard of living to that of our parents. A recent poll by Ipsos Mori shows that only 36 per cent of millennials believe they will be financially better off than their parents. The figure among baby boomers is about 20 percentage points higher.

In our paper, we show that this pessimistic outlook is reasonable given the economic experiences of younger generations. Absolute mobility – the estimate of the fraction of young individuals who earn, in real terms, as much or more than their fathers at the same age – has fallen by more than 20 percentage points in the decade since the Great Recession. In 2005, more than half the young adults aged 30 earned as much or more than their fathers (see Figure 1). By 2017, there had been a dramatic fall, with only about one-third achieving this. In other words, the majority of young adults face economic decline on this measure, rather than progress.

Figure 1. Trend in absolute mobility in the UK, 1993 – 2017

Source: Authors’ calculation. Notes: Sample includes 30-year old young adults, and fathers who reported positive wages. Data is taken from the Quarterly Labour Force Survey (1993-2017), the Family Expenditure Survey (1968-2017) and the British Cohort Study (1970).

Is the fall in absolute mobility unique to those at the start of their careers? It does not seem so, as prospects are poor even for those around age 40 who would be expected to be at a more stable stage in their careers. That said, the magnitude of the fall in absolute mobility is lower. In other words, although both Generation X and millennials are doing worse than previous generations, millennials have been worse hit since the Great Recession.

Fall in real wages

There are three drivers of absolute mobility: economic growth as seen in the growth of real weekly wages, wages inequality and relative mobility. We find that the fall in real weekly wage growth is central to the fall in absolute mobility.

Between the 1980s and early 2000s, median real weekly wages grew at around two per cent per annum. Although the rate of growth slowed at times, it was almost guaranteed that real wages would be higher each subsequent year, even in recessions. Unfortunately, the Great Recession brought this experience to an end. Wage growth since the Great Recession has no longer kept pace with price inflation. Consequently, the UK has experienced an unprecedented fall in real weekly wages.

Between 2008 and 2017, median real weekly wages have fallen by around five per cent. Not only are the real weekly wages of young adults falling, the comparison group of parents for these young adults benefited from strong wage growth. As a result, these young adults face a double hurdle in catching up to the wages of their parent’s generation.

But what if wages had not fallen? How much would this change the picture? We can check this by calculating what wages could have been if they had continued to grow at two per cent annually (like the pre-recession trend), and re-estimate absolute mobility. In the real world, absolute mobility began to fall from 2007 and was only 33 per cent in 2017. In the counterfactual scenario, on the other hand, absolute mobility grew very slowly and was much higher at 55 per cent in 2017.

Figure 2. Absolute mobility under wage growth

Source: Authors’ calculation

Changes to relative mobility

Relative mobility, another factor determining absolute mobility, is “the link between a person’s occupation or income and the occupation or income of their parents.” When this link is strong, children born to poorer households remain poorer in adulthood than children born to richer households, and vice versa.

If everyone made twice as much as their parents, they would experience upward absolute mobility, but there would be no change in relative mobility as their link with their parents’ wages remained unchanged. In other words, relative mobility measures if people can achieve a higher quality of life conditional on their family background, while absolute mobility highlights if they enjoy a higher quality of life, regardless of their family background.

Traditionally, economists have been mostly interested in relative income mobility. In the UK, relative income mobility worsened for children born in 1970 compared to those born in 1958 but has probably been stable since , although it has not been measured in exactly the same way. To get a better understanding of how changes to relative mobility might alter the experience of absolute mobility, we assume a few different scenarios.

Figure 3. Absolute mobility under different levels of relative mobility

Source: Authors’ calculation

First, we consider what might have happened if the UK had a weaker link between the wages of parents and children. If the UK were more relative mobile, like Norway, absolute mobility would only be one percentage point higher in 2017 compared to the baseline level of 33 per cent (see Figure 3). On the extreme end, if the society demonstrated perfect relative mobility – no link between people and their parent’s wages – then, absolute mobility would only be three percentage points higher.

The reverse could also be true. Relative mobility in the UK could be lower than assumed, such as that of the USA. In that case, absolute mobility today would be only slightly lower. However, if relative mobility was at its minimum, that is no matter the effort, people always remained as rich (poor) as their parents, then absolute mobility today would be significantly worse (only six percent).

These scenarios highlight the empirical relation between relative and absolute mobility in the UK. Unless relative mobility drastically worsens, its role in determining absolute mobility is limited for the UK.

Conclusion

Absolute mobility is an important marker of economic progress, and essential in evaluating the UK’s economic and social health. For much of history, economic growth ensured that each subsequent generation did better than the past, rendering true the saying that the rising tide will lift all boats. However, this is no longer true. Our paper highlights the need for serious discussion on how real wages can be boosted and, if not, on other policy options that could be implemented to reverse the trends of falling absolute mobility.

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Notes:

This blog post is based on ‘Falling Absolute Intergenerational Mobility’ presented at the Royal Economic Society Annual Conference 2019.

This post gives the views of its author, not the position of LSE Business Review or the London School of Economics.

Featured image by John Moeses Bauan on Unsplash

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Jo Blanden is a reader in economics at the University of Surrey and a research associate at LSE’s Centre for Economic Performance (CEP). Her research focuses on the economics of education, particularly early years; family background and educational attainment; and intergenerational mobility.

Stephen Machin is professor of economics at LSE and director of the school’s Centre for Economic Performance (CEP). His expertise is in labour market inequality, economics of education and economics of crime.

Sumaiya Rahman is a PhD student in the School of Economics at the University of Surrey.