Young people going backwards as older Australians power ahead

It’s official. The Federal Government’s own economic think-tank has confirmed that young people’s real incomes have fallen over the past decade, even as everyone else has enjoyed continued pay rises.

And the younger you are, the worse the situation is.

In a report released today, the Productivity Commission found that 15-24-year-olds had seen their average income — adjusted for inflation — fall by 1.6 per cent per annum between 2008 and 2018.

The commission said that meant the incomes of Australia’s youth were effectively the same in 2018 as they were in 2001 — they have gone nowhere this century.

Those in the 25-34 age bracket fared slightly less badly, with their incomes down 0.7 per cent per year since the global financial crisis and wage growth prior to 2008 meaning that they are 21 per cent better off than their equivalents were at the turn of the century.

But the older you were, the better you did.

The average income of “prime-aged” people (35-64) grew 1.4 per cent per year, while the average incomes of those aged 65 and over jumped 3.2 per cent per annum.

Annual growth in average disposable incomes by age group.
Annual growth in average disposable incomes by age group.(Supplied: Productivity Commission)

“The greatest increase in disposable income per person over this time was that of people aged 65 and over, whose disposable income per person was 86 per cent higher than in 2001,” the commission observed.

Youth wage stagnation

The biggest contributor to this was wage outcomes.

“Our analysis suggests that growth in wage rates for people aged 20-34 was flat from 2008 to 2018. In contrast, average wage rates for people aged 35-54 continued to grow as they had before 2008,” the commission explained.

Real wage rates and hours worked both fell for under-35s, while both rose strongly for older age groups.
Real wage rates and hours worked both fell for under-35s, while both rose strongly for older age groups.(Supplied: Productivity Commission)

So, why have young people been getting lower, or no, pay rises at work, while older people continue to see wage increases?

It is not because particular groups of young people are being especially disadvantaged at work — in fact, unlike older age groups, the commission observed no increase in income inequality among younger cohorts.

“The gap in the growth of wage rates between young and older workers was not driven by labour market changes that affected specific education levels, industries or occupations; nor was it driven by longer-term trends such as job polarisation [the loss of middle-income jobs, such as in manufacturing],” the commission found.

“It is a phenomenon experienced by the majority of workers aged under 35, even if some subgroups did see some increase in their wages.”

‘Advantage of incumbency’

The commission has a few theories as to what has been going on.

“An imbalance between labour demand and labour supply leading to young people facing greater competition as job seekers while older workers benefit from the advantage of incumbency is consistent with the divergence in wage rate growth. The evidence in support of this is convincing,” it noted.

The problems here are coming on both the demand side — economic growth has been weaker in Australia since the global financial crisis and the wind-down of the mining investment boom — and the supply side.

However, based on previous work it has done, it argued that Australia’s relatively high rates of migration have not contributed to the wage stagnation experienced by young people.

“Although immigrants increased labour supply, evidence shows that they also created labour demand in the firms they bought goods and services from; the overall effect was neutral.”

This analysis suggests the halt in migration during COVID-19 will do as much damage to demand and job creation as it will benefit younger workers by decreasing the supply of labour.

Bleak post-pandemic outlook

In fact, the Productivity Commission draws grim predictions for the post-pandemic future for young people from its research on the recent past.

“The apparent imbalance between labour demand and labour supply led to a number of adjustments, among them an increase in part-time work in sectors with a high absorptive capacity, rather than widespread unemployment,” it noted.

“But many of the sectors with absorptive capacity (such as retail, hospitality, and tourism) are precisely the sectors that have been most damaged by the current crisis, and whose pattern of recovery is uncertain.

“Evidence from the first three months of the crisis suggests that the workers in these sectors were primarily young and on low wages.

Even before the pandemic, the commission observed that the long-term unemployment rate for under-25s had more than doubled by 2018.

The long-term unemployment rate for under-25s has doubled.
The long-term unemployment rate for under-25s has doubled.(Supplied: Productivity Commission)

Adding to the bleak outlook for today’s young, the commission noted that people under-35 had less protective savings coming into the pandemic, and many have already depleted those, while the recession has so far had much greater effects on workers (who tend to be younger) than share investors (who tend to be older).

To cap it all off, the commission observed that it is the young, with decades of working life ahead of them, who are likely to carry the greatest burden of paying for the response to the pandemic and recession.

“Young people are likely to experience higher taxes during their working life, to recover the current cost of dealing with the pandemic,” the commission noted.

“This highlights the need for future policy to take account of the distributional impacts of the current recession.”

One of those distributional impacts is that young people whose parents have lower incomes or wealth are being disproportionately affected by the inter-generational income inequality.

While the rate of people in their late 20 still living at home rose from under 10 per cent in 1981 to more than 17 per cent in 2016, saving those who do an average of a third of their income in rent, the commission pointed out this is not possible for all.

“Intra-family transfers have helped cushion young people from the decline in expected income that they face, and they also reflect the growth in income for older Australians,” it argued.

“But transfers have not been possible for all families: low-income families transfer less, and are less likely to have their children continue to live at home.”

While families with means have been helping their children compensate for weak labour market outcomes, the Government has been pulling back, with fewer young people drawing most of their income from welfare benefits.

The proportion of young people getting more than half their income from welfare is steady or lower.
Despite weak labour market outcomes, the proportion of young people getting more than half their income from welfare is steady or lower.(Supplied: Productivity Commission)

“Transfer income declined substantially for people aged 15-19, and remained relatively steady in real terms for people aged 20-34,” the commission observed.

In fact, over-65s were the only group who saw any income boost from government “transfers”, namely the aged pension, while all other age groups saw declines.

Average annual growth of each income source 2008-2018.
Average annual growth of each income source 2008-2018.(Supplied: Productivity Commission)

And, even with action now to improve outcomes for young Australians, the Productivity Commission warns that some permanent damage may have already been done.

“While every cohort of young people moves up the jobs ladder in the years after graduation, the later cohorts do not make up the lost ground: their occupational status does not catch up to that of previous cohorts,” it observed.

“As a result, young people in the labour market after 2008 are likely to experience some ‘scarring’ — long-term negative impacts on their wages and occupational choices.”