Feeling the squeeze affects the generations

The longer-lasting impact of the Covid-19 pandemic will be felt by the young. Governments understand things need to change – but are they able to deliver?

| 7 min read

We are entering a period when high inflation on both sides of the Atlantic will erode the real value of incomes. The savings rate will fall, and some people may draw down some of the accumulated cash from lockdown, when they kept their jobs and cut their outgoings on travel and hospitality.

Polling tells us that more people think the older generations suffered more from the pandemic than the younger, based presumably on the much-greater vulnerability of the elderly to serious forms of the disease. If we look at the economic impacts of the pandemic response, the effects were probably worse for the younger generations.

Chart 1: Net change in EU employment (Q4 2019 – Q4 2020) by gender and age group

There is now more discussion of damage done to those at school and college who missed out on in-person teaching and lacked the social interaction that comes from daily contact with fellow students. They also faced disruption to examinations and assessment procedures.

There is also a recognition of the greater difficulties facing young workers. They were more likely to work in areas such as travel and hospitality, where they were prone to lose their jobs due to the impact of Covid-19. They faced more difficulties in acclimatising to a new job if they got one, without the same daily contact with more-experienced staff in an office or other commercial settings. The world will need to make some changes to help those young people through what remains of their education and into work as the pandemic restrictions pass into history.

Biden plan hits a roadblock

In the US, Joe Biden came to power determined to improve a lot of young people through his much-advertised American Families Plan. The central promises include offering an extra four years of free education by providing free two years of pre-schooling for three-to-five-year-old infants and two years of free college education for 18-year-old students. The aim is to move from a minimum of 13 years of formal education to 17 years, raise the achievement levels of those who previously had not been able to go to college or to pre-school previously.

Europe cannot afford to lose the most educated group it has ever had.

President Biden wants to make childcare more affordable to allow parents with young children to take lower-paid employment whilst affording the professional childcare back-up they need. He wishes to extend paid leave for family reasons. He seeks a major extension of family tax credits.

These plans are embedded in his budget for the current year that remains blocked by a senator from his own party who refuses to vote in its favour – Joe Manchin, the Democratic senator from West Virginia. Maybe he will be able to negotiate a lesser package which still enables him to claim some progress on his road to more state help for families to go to work and to look after children, and for young people worried by the costs of education.

Chart 2: Index (Q1 2000 = 100) of US wages, house prices, and urban rents over last 20 years

The European Commission (EC) ordered a major study of Intergenerational Fairness. Published in July 2021, it mainly looked at the generational impacts of the 2007-14 banking and Euro crashes on incomes and employment. It had a last chapter which considered Italian evidence of the impact of Covid-19-related closures.

The study worried that: “For the first time since the Second World War there is a real risk that the generation of today’s young adults ends up less well off than their parents. Europe cannot afford to lose the most educated group it has ever had and let intergenerational inequality condemn its future”.

Its conclusions were more modest, pledging “the development of a harmonised dataset at EU level… to enable a thorough and comprehensive understanding of intergenerational fairness in the future”.

The EC itself has a statement of aims relating to young people: “Through its policies the EU aims to give young people more equal opportunities in education and the job market and to make sure they can participate fully in all areas of society. This is achieved through various means, visibly by engaging in dialogue with young people and through the Erasmus+ programme”.

Much of the work on taxing and subsidising between generations within the EU is carried out by member-state governments. Most advanced countries have substantial transfers of money to pensioners, which is usually a time-shift transfer which the elderly paid for when they were in work.

In practice, advanced countries depend on the theory that the working generations will support both the young and the old, paying tax to support free education, maternity and child health services, and paying to support pensions and top-up benefits for those above working age. Some in the EU are now questioning the stability of this intergenerational contract, as the bloc is entering a period of falling working-age populations and rising retired populations. This worsens the dependency ratio, meaning those in work need to pay more tax to sustain the pensions of those who are retired.

Chart 3: Old age dependency ratio for major economies since 2000

Governments will need to spend more on easing the pressures on low-income budgets as the energy prices eat away at household finances. They will also need to do something to assist young people to adapt to the changes that pandemic measures have created. The US has less of a problem longer term because its demographics keep a better balance between the working-age generation and the dependent generations.

EU and member state budgets will be more stretched this dependency trend. This means the EU will have less scope to afford an “American Families Plan” approach. It looks as if, on both sides to the Atlantic, rhetoric about rebalancing in favour of the young outruns the ability to deliver.

The best they will be able to do is to provide conditions for a buoyant labour market, and to strengthen their offerings on education and training to enable more to have the skills and confidence to take better-paid jobs.

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Feeling the squeeze affects the generations

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