The SMF #FridayFive: 11 December 2015

This week’s #FridayFive from the Social Market Foundation has a theme of intergenerational fairness.

Does the UK’s slump in productivity growth, rising wealth for older generations, and recent falls in real wages for younger workers, mean that younger people will be worse off than their parents? Are these trends exacerbated by policies that have seen pensioners protected from the worst effects of the financial crisis, with those of working age taking most of the strain?

The UK’s productivity has recently been a frequent source of disappointment. As we demonstrated in our report ‘Growing Businesses’, Germany, the US and France all have around 25% greater productivity performance than the UK. Despite rising employment numbers in recent years, productivity has yet to recover and is a long way off its long term trend, raising the possibility that productivity growth will be permanently lower in future.

This poor performance has led to gloomy predictions on the fate of younger generations. Faced with a shift in wealth to older generations – particularly through rising house prices – and the possibility that productivity gains over the coming decades will not match the previous decades, younger generations could have lower living standards than their parents. As John Hills argues in his book ‘Good Times, Bad Times’, younger generations are, on average, unlikely to build up sufficient lifetime wealth to match that of their parents. People in their 20s and 30s would have to save £33 a day for the next 30 years to match the wealth of their parents.

These trends have come alongside government policies that have seen younger people take most of the strain from the aftermath of the financial crisis. The last Labour government sought to reduce poverty rates for pensioners and children by increasing the state pension and implementing substantial cash transfers to families with children. The previous Coalition, and the current Government, have essentially continued the first policy whilst abandoning the second, with commitments to continue the ‘triple lock’ for state pensions, the protection of most pensioner benefits, and increases in health spending. This is changing the shape of the state, with greater weight being placed on spending on older people and less on working age families.

However, a rare optimistic prognosis on the fate of younger generations is given by Barry Eichengreen, Professor of Economics at the University of California, Berkeley. He argues that technological advancements take a long time to have a positive impact on productivity. The initial effect of technological advancements can in fact be negative, as firms and public services adjust to new ways of operating. A good example is healthcare: computerised healthcare records could provide a much more efficient way of storing and sharing patients’ information, but many clinics and hospitals in the US still rely on fax and telephone.

But if attempts are made to create a new more efficient system, in the short term productivity can fall as staff spend time attempting to develop the new system, whilst still trying to maintain high levels of service. The UK has its own very similar experience, with an estimated £10bn lost on the aborted NHS patient records system. But, argues Professor Eichengreen, these are just teething problems – in decades to come, when we’ve made the transition to an electronic healthcare system, we’ll look back thinking that all the experimentation was worth it.

Perhaps the likelihood that younger generations achieve the living standards of their parents now rests on whether recent improvements in technology – such as the internet and mobile phones – finally feed through to increased productivity and wages.


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