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The Growing Ranks of the Downwardly Mobile

Updated: Oct 2, 2020

Recession is upon us again, and threatens to derail the career paths for young men and women, already struggling to maintain living standards amidst weak income gains and surging prices for the essentials of housing, health care and education. The financial crisis and recession of 2008-9 set back the careers of emerging independent Millennials, who only recently started to claw back some of the losses from the housing bust, and now, just as the future had started to look marginally brighter, huge uncertainty looms.

One hopeful measure of the past few years was the return of rising real median incomes for men and women aged 25-34. Some of that improvement was a definitional change in the measurement of income, which led to some sharp increases around 2014, but an improving labor market and low unemployment were finally working through to a noticeable pickup in incomes. Despite the multi-year improvement, real median income for young men still hadn't broken out of a long downward trend, and was still nearly 7% below 1999 levels.

The trend in median income for young women shows a more hopeful picture. But much of the big gains for women were achieved prior to the late 1990s, when a steadily rising female labor force participation rate generated significant increases for women overall. Rising educational attainment for women also helped fuel income growth.

These starkly contrasting pictures of income trends for men and women also reflect the tougher impact of recession on men. Prior to 2000, economic downturns fueled outsourcing and offshoring trends. Manufacturing jobs fell substantially, with those job losses disproportionately hitting men. When some of those jobs did come back, tiered wage agreements created openings with substantially lower pay for new workers. Subsequent recessions hit hard again, with the 2001 tech bubble recession and 2008 housing bust recession slamming male-dominated technology and construction jobs, with manufacturing jobs also being shed along the way.

All other things equal, we'd expect the current sharp recession to drive down median incomes again, but, in the current crisis, all things are most decidedly not equal. Job losses to date stemming from the COVID-19 economic shutdowns are well over 20 million, pointing to an unemployment rate probably close to 15% in April. That is far above what occurred during the 2008 recession, when the jobless rate peaked at 10% (in October of 2009).

The nature of job losses in 2020 is also vastly different. Even if we assume a gradual pace of reopening in coming months, with businesses functioning at lower operating rates, the most optimistic case would push the jobless rate head back down to about 8% by the end of next year. The failures of disaster spending "stimulus" will cause many small businesses to shutter permanently. These failures will predominantly be in the lower-paying retail, hospitality and leisure sectors. In other words, the bulk of job losses will come out of the bottom rung of the income distribution. But job losses for people earning below the median won't have any effect on the median. They will simply go from median-$x to $0, and the median calculation will only change to the extent that job losses also hit those above the median. In short, we expect a lesser impact on median incomes, but a bigger impact on poverty rates, which look likely to surge. Much of this can be mitigated, but will require a much bigger and better targeted government relief effort for those hardest hit by business shutdowns.

With job losses disproportionately falling on younger workers during recession, Gen Z will be hardest hit. This is not to say that Millennials are escaping the current crisis unscathed. The oldest of the generation is just hitting age 40, normally transitioning toward career peak-earnings years. Yet for many, the long struggle to launch careers that were impacted early on by the last recession has hit another huge setback.

A recent New York Times article illuminated the challenges in a series of portraits on Millennials at age 40, finding:

"Fully 92 percent of the Americans who reached their 30th birthday in 1970 earned more than their parents had earned at the same age, even after adjusting for inflation. But beginning in the 1970s, the economic ladder gradually became harder to climb, and fewer Americans were able to surpass their parents. In the cohort of Americans who turned 30 in 2010, only half earned more than their parents at the same age, according to research by a team of economists led by Raj Chetty, a Harvard professor. The American dream had become a coin flip."

And yet for Generation Z, based on historical median income trends, and the typical impact of recessions, the path forward looks even rockier. Another New York Times article touched on the brutal effects that Millennials experienced trying to enter the job market after the financial crisis, and how that bodes ill for those GenZ just leaving school and trying to get a toehold in the labor market:

"Historically, college students who graduate into a recession have settled for lower-paying jobs at less prestigious companies than people who finished college even a year earlier. Economists have found that the impact of that bad luck can linger for as long as 10 or 15 years, leading to higher unemployment rates and lower salaries..."

With a larger share of Gen Z saddled with substantially heavier education loan debts to repay, loan forbearance will only delay the pain. Once finally employed, working a high-school level job with a bachelor's degree will likely provide little in the way of savings once debt service and the high cost of housing (mostly rent) are accounted for. And with the price-tag of graduate school becoming increasingly prohibitive, a smaller share of Gen Z is likely to hide from the recession by remaining in school.

Conclusion: yet another dramatic economic cycle is unfolding amidst a hugely insufficient social safety net inevitably leads to tough times ahead for another generation. A large majority of Gen Z will fail to attain the living standards of their parents, repeating the experience of Millennials.


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