Look past the economic gloom, millennials and Gen Z – the future is bright

Open this photo in gallery:

John Rapley is a political economist at the University of Cambridge and managing director of Seaford Macro.

The complaints of young people that they have it bad are not without foundation. They’ve graduated with heavier debt loads, into a less forgiving job market, as home ownership was getting beyond reach. They’ve had to deal with the legacy of previous generations’ carbon profligacy, with studies revealing that young people despair of a climate crisis whose chief culprits will be long gone by the time it hits hard. And now, just when it seemed things couldn’t get worse, surging inflation and higher interest rates have eroded their wages, pumped up their debt costs and put those already moribund hopes of buying a home in the ground.

But look beyond the gloom of the moment and you’ll find reasons for young people to feel hopeful. I confess, the look I get when I tell people that lies somewhere between “WTF” and “Have you discussed this with a doctor?” But seriously, explore the deeper currents in the economy and you find some interesting stuff.

There will be some pain at first. The year ahead will probably be a tough one for most people, especially if we enter a recession. However, once we get to the other side of it, the economy will look different from what we’ve known. In particular, it will favour young people in a way that hasn’t been true for decades.

For starters, work will become a more important source of income. It shouldn’t sound radical to say the work we do will determine our income, but it is. Over the past 30 years, government and central bank policies created an economy in which, increasingly, not what we did but what we owned determined our income. Whereas historically wealth resulted from the earnings we saved, and thus grew as they did, in the late 20th century wealth began growing faster than income. You’d have been hard-pressed to find a job where you could climb the ladder so fast that your pay rose 30 per cent or 40 per cent in a year. But if you owned property at the top of the bubble, you could sit back, literally, and watch just that happen.

Of course, since you need money to buy assets, this type of economy favoured owners over workers. Those trying to build capital the old-fashioned way, by squirrelling away a bit of each paycheque, often found it hard to get ahead. As anyone who tried to build their first down payment in the past few years could tell you, the cost of assets often ran ahead of savings. But the folly of this model was fully exposed when the bitcoin bubble revealed that if you had money to spare, you could make a fortune while reclining on a beach in Thailand (indeed, exposing the folly of central bank policies may have been the entire point of bitcoin).

But those days are gone. While recent headlines have focused on falling stock markets and house prices or the cryptocurrency crash, the really big story of 2022 has been that, amid this carnage, wages have kept rising. We’ve mostly ignored this, since inflation has erased the wage gains. But while real wages have indeed fallen by a couple of percentage points across Western economies, that pales in comparison with what’s happened in real estate and the stock market, where real declines in value are currently running at 20 per cent or more.

Moreover, the decline in real wages may not last much longer. A recent analysis I did with some colleagues found that, owing to structural and long-lasting changes in global labour markets, workers have gained more bargaining power. As a result, wages have been steadily closing the gap with inflation and may well turn positive before long. The resulting “stickiness” in inflation may thus force central banks to keep interest rates up, as I wrote recently, prolonging the pain in asset markets. So while labour income will rise, oft-heard predictions of 2023 rebounds in stock and property markets may prove too optimistic.

Add it all up and you have a situation in which, over time, rising incomes gradually make assets more affordable to working people. If, say, house prices stagnate for the next few years, but wages keep rising, mortgages will steadily become more manageable, even at current rates of interest.

None of this will happen overnight. It will feel gradual, almost imperceptible, the relative value of labour income rising incrementally over the next few decades.

Moreover, the effects of this changing balance between owners and workers won’t be spread evenly. The early trends suggest that the less you earn now, the more you stand to gain in the future. That’s because the globalization of manufacturing, which in recent decades hammered the wages of unskilled workers in Western countries, appears to have peaked. In contrast, the globalization of high-end services has received a fillip from the pandemic experiment in remote working. Whereas previously a firm could move its assembly line offshore while keeping the design and engineering at home, now the reverse will be true.

Would a less unequal society be such a bad thing? An economy that works better for everyone might well diminish the lure of authoritarian populism, which in recent years was able to exploit the sense of alienation that many working people felt. And if you’re someone in, say, your 30s, you can look forward to a working life that may be a good deal more promising than it may have looked as recently as a year or two ago.