Why Young Workers Might Benefit

Posted by: Michael Mandel on October 09

As I’ve written quite a few times before, the post-2000 period has been a terrible time for young workers. Their wages were falling, and the price of assets such as homes—which young workers did not own— were rising.

The fall in home prices is making housing more affordable for the young. And Dean Baker makes the same point about equity prices. He writes:


The Low Stock Market: A Gift to Young Workers

I’m waiting to see a reporter write this story, but I’m not holding my breath. The basic point is simple, given a path of future profits, if the stock market is high, it will cost our children and grandchildren much more money to buy a certain share of these future profits than if the market is low. In other words, if the S&P is at 1000, then our children will get much higher returns on their savings than if the S&P is 2000. (There is very little feedback the other way — stock prices have little impact on profit growth— so the assumption that the growth path of profits is independent of stock prices is probably a reasonable one.)

So, the young people out there should be celebrating the plunge in the stock market, except for the relatively small group who were anticipating inheritances from their parents. You can’t please everyone.

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Reader Comments

AE

October 10, 2008 09:54 AM

Except now our damn parents are going to have to live with us.


... once we can afford to move out.

dave

October 11, 2008 02:42 PM

Baker makes the assumption that the path of future profits for public companies is upward sloping over a young worker's time horizon (say 30 years out).

A year ago, nobody would dream of questioning this assumption. But what about now?

As you've pointed out in a previous article, the real 10 year return on the S&P is -2% over a relatively prosperous period for the US economy.

Its entirely possible that the real return of the broad market will be even more steeply negative over the next 10 years.

I'm in my mid thirties...I could find myself in my mid forties with the value of my 401k destroyed by two decades of negative returns.

Joe Cushing

October 12, 2008 12:04 AM

It's interesting that Dave brought up the 10 year negative return on the S&P because I was going to talk about the same thing but from a very different angle. The reason we have had the 10 year flat stock market is because stocks were too damn expensive in the late 90s. Stocks were wa-a-a-a-a-ay overpriced. Finally, stock prices are right for the time we are in. I have been cheering the drop. Although I do worry about my parrents a bit. They are young enough to benefit from another stock run-up but my dad is retired now and looking for new work. It's a terrible time to be retired. It is better than being unemployed though.

Dave, Are you planning on retiring in your mid 40s? It won't be two decades anyway. The next stock bubble will be higher than the last one. We have not had a decade without returns by the way. You have to compare peak to peak. Even then, it's hard to get a clear picture. Michael was just being dramatic for the fun of it. One thing is clear, the latest stock run-up was much smaller than the 1990s and our more recent smaller wave was higher than the bigger wave of the past. That tells me there was significant growth in the last 10 years.

YoungWkr

October 12, 2008 09:09 AM

For those of us still employed and without debt, this is the first time we are getting a "purchasing power".

For the last 10 years, the cost of housing, commodities, education, and health care all grew at rate faster than anyone's income.

KF

October 15, 2008 06:12 PM

Yes, but try being a young worker and actually getting a loan to purchase that "now more affordable home." Cruel irony, really.

Playing off YoungWkr's October 12 comment: What will be interesting is to see what college and graduate school tuition will do in the coming years...it will rise, of course, but at what rate? The ivies will still fill out their rosters, but what of the regional schools with more responsive demand? Several student loan sources still have their funds in a stranglehold, and selected companies are cutting back on "unnecessary costs" like employee tuition reimbursement. Because of the time delay in loan applications and matriculation, the worst of the major effects may not echo through higher ed for several months yet...

Thank you for your interest. This blog is no longer active.

 

About

Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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