Rising asset prices alongside a long-term stagnation in earnings have shifted the economic dividing lines. Wealth has grown rapidly relative to income. The economic prospects of young generations are struggling to match, let alone exceed, those of their predecessors. And recent declines in social mobility may accelerate as inherited wealth becomes an increasingly important part of lifetime resources. While income remains important, it is wealth that is increasingly at the heart of the most pressing economic inequalities today.
These are among the conclusions of new research for the IFS Deaton Review of Inequalities, funded by the Nuffield Foundation and published today.
- Because wealth has been growing much faster than income, it is becoming harder for working families to save enough to climb the wealth distribution. In 2008, it took 10 years’ worth of typical full-time gross earnings to move from the middle to the top of the wealth distribution. By 2018, this had increased to almost 16 years.
- The huge growth in house prices has contributed to collapsing rates of homeownership and is acting to push up the amount of the country’s wealth held by older generations.
- People born in the 1980s have had lower rates of homeownership than all cohorts born from the 1940s onwards.
- Only 36% of those born in the 1980s were homeowners by age 30, compared to 55% of those born in the 1970s and over 60% of those born in the 1950s and 1960s.
- Half of middle-income adults in paid work are renting. In that sense, they are now more like those on the lowest incomes than those on the highest incomes.
- The difference between the homeownership rates of the middle (50%) and top (73%) quintiles of the working-age income distribution has not been greater since consistent data became available during the 1960s.
- The pandemic and its aftermath may well have increased wealth, and wealth inequalities, further. Increases in saving were greatest for the most well-off and rises in asset prices also benefited them.
- Rapid rises in wealth for those who already owned some wealth has coincided with a long-term stagnation in earnings. This slow-down in earnings has meant that younger generations can no longer expect to see greatly improving living standards as they age. For example, typical income for those born in the 1940s and 1950s approximately doubled, in real terms, between their late 20s and early 50s. Those born in the 1960s saw a rise of around a half from age 25 to 50; on current trends, those born in the 1970s will see a rise of less than a quarter over 25 years.
- Today’s intergenerational inequality may be tomorrow’s lack of social mobility. With large rises in wealth combining with long-term stagnation of working-age incomes, inherited wealth is becoming increasingly important for the lifetime economic resources of young generations. Parental wealth is becoming more important in determining how much money you have.
Robert Joyce, Deputy Director of IFS, said: ‘A generation of Britons has ridden a wave of growing asset prices, pushing up the value of their houses and investments. Meanwhile, more than a decade of stagnant earnings has held back younger generations for whom earning their own economic success has become increasingly difficult. The fact that we can no longer be sure that the young will grow up with living standards that match their predecessors is a remarkable social change.’
Mike Brewer, IFS Research Fellow and Chief Economist of the Resolution Foundation, said: ‘The rise in household wealth relative to income is likely to make the UK a less socially mobile country, and to impede the narrowing of other longstanding economic inequalities, such as between ethnic groups. Closing large wealth gaps materially when incomes are stagnant is extremely difficult.’
Alex Beer, Welfare Programme Head at the Nuffield Foundation, said: ‘The divide between people with and without assets and those with and without wealthy parents is increasing. This divide not only presents a barrier to social mobility but also increases the risk of divisions within society. To improve living standards, a holistic approach is required which addresses wealth inequalities as well as stagnant wages and the increasing pressures on household spending. Such an agenda for action will be developed by the IFS Deaton Review of Inequalities in 2023.’