Generational economic inequality: Life course approach to income, consumption and wealth between cohorts

Abstract

The resources of one generation significantly affect the life chances and economic opportunities of the subsequent generation. It isn’t merely about “how the pie is sliced” but a more complex question concerning how it fluctuates throughout life at different stages and how these economic life stories compare across generations. Consequently, one generation’s position in the hierarchy of financial affluence depends on the conditions of a given period. Previous studies have primarily focused on income distribution, providing a somewhat limited view of inequality. While there are more multidimensional approaches to economic inequality, they fail to consider that economic resources do not remain static. The level of income depends on the life stage or the time the individual was born. The period will dictate the available opportunities to strive for a better economic outcome.

To build upon and enhance previous analyses, this study offers new information in two areas. First, the study considers both the life course of each cohort and the period. Second, a holistic framework is applied to economic measures, accounting not only for income but also for consumption and wealth. The underlying logic is that income, consumption, and wealth do not operate in isolation, as one needs income to acquire goods and services and save the surplus for future use.

This study evaluates how the three types of economic resources are distributed across cohort differences over the life course, providing a more comprehensive analysis of economic inequality. The analysis combines high-quality household-level income, consumption, and wealth data with longitudinal register-based datasets. The data cover various periods spanning from as early as 1966 to 2021. The data are a representative sample of the population, and the register datasets are census datasets which contain the entire Finnish population. The analyses use state-of-the-art age-period-cohort models and multilevel regression models.

The results demonstrate how income, consumption, and wealth vary between generations and indicate which background factors contribute to income development throughout the life course. This directly supplements previous multidimensional research endeavours on background factors.

Articles I and II focus on income from the age-period-cohort perspective and especially from the between-cohort perspective. Overall, the results suggest that from the 1970s cohort onwards, no income development was related to the linear trend of average income development. Similar trends are found in the second sub-study on income, as the 1980s cohort did not increase their income in relation to the 1970s cohort. Thus, overall, it can be stated that there is income stagnation among the younger cohorts. In terms of age, period, and cohorts, the research identified cohort and period effects as being statistically significant, with no age effects observed after introducing controls, especially main economic activity as the strongest explanatory variable. This is also supported by the second sub-study, which was conducted using registers. Here, education, unemployment, and occupational status explained most of the income inequality between cohorts, especially at the peak career point during the middle of the life course. In generational terms, the results support previous findings where the Baby Boomers are the ‘winners’ and the youngest generation are the ‘losers.’

Article III analyses necessities and leisure-time expenditures between high- and low-income earners. Findings suggest that both consumption and income have maintained a stagnant gap between both extremes of income groups over cohorts. Overall, the age-period-cohort analysis reveals that the relative expenditures between the two income groups have slightly increased in favour of the high-income group. The more affluent end of the spectrum seems to have been gradually investing in leisure time over cohorts, while the low-income group remains ‘leisure poor.’ This could imply that those in more economically adverse situations have more difficulty participating in certain societal functions and seeking self-improvement in areas such as hobbies and other downtime activities. This could mean that either the prices of these goods and services have become more expensive, or there is less opportunity to invest in these activities when income is low.

Article IV examines wealth inequality between cohorts over the life course. The results show that overall, inter-cohort wealth inequality in gross and net wealth has not increased over time. The results show potential periodic differences related to age, as overall wealth did temporarily decrease during the financial crisis of the 1990s, but they do not have a permanent impact on wealth accumulation. Wealth accumulation over the life course does not seem to be hindered by economic circumstances in the long run. Yet, there is an exception. The 1980s cohort displays a slower rate of wealth accumulation than the preceding cohort. It also bears a higher debt load coupled with slower loan amortization, which has delayed the purchase of dwellings and pushed it to a later age. Consequently, the prolonged loan amortization could have long-term implications for total wealth accumulation, leaving future retirees to live on tighter budgets. Financial wealth shows variations among younger cohorts, where their initial investment ages are lower compared to other cohorts. These findings support previous results indicating that building personal wealth and assets is becoming increasingly important.

To summarize, both the period and cohort are pivotal components in all economic metrics. While age seems to have a certain degree of influence, the economic inequality is more significantly associated with the timing at which different cohorts encounter various periods. The younger generation, in particular, seems to be facing economic pressure.