The prevailing belief is that because of the relatively large size of their generation, the baby-boomers, generally defined as those born between 1949 and 1964, are the first generation to be less well off, in economic terms, than their parents. This conception is based on the idea that as the baby-boomers matured and entered the work force, they would face a more competitive labor market as a result of the large size of their generation. The increase in competition in the labor market would lead to a decrease in demand and a subsequent decrease in the wage rate. However, various studies have observed that the baby-boomer generation has been able to compensate, through demographic decisions, for the decrease in relative wages and is actually better off economically than their parent’s generation. The baby-boomers delayed marriage, had fewer children, and women increased their labor force participation in order to offset the effects of increased labor market competition. The question is whether the baby-boomers traded their chance to raise families in order to ensure their increasing material wealth. In order to prove that baby-boomers were able, for the most part, to mitigate or even overcome the labor market effects of their large generation through demographic decisions, we will examine various factors: the adverse labor market conditions experienced by the baby boomers; how the baby boomers compare in terms of wealth and household income relative to their parents; the demographic decisions made by the boomers; and whether those decisions affected the distribution of income within the baby-boomer generation.
The analysis of the relative economic and demographic well being of the baby-boomers is done within the framework of the life-cycle hypothesis. The life-cycle hypothesis is based on the notion that the fertility rate of a generation is determined by their income relative to the economic aspirations and expectations formed during their teenage years. These expectations are based on the relative income of their parents. The theory dictates that because of the adverse labor conditions caused by the large number of entrants in the labor market, the baby-boomers were relatively less well off initially relative to their expectations. They delayed marriage and had fewer children in order to narrow the gap between their real and expected levels of income. A closer examination of the economic and demographic data serves to support the life-cycle hypothesis.
The large cohort size of the baby-boom generation led to an increasingly competitive labor market as they matured and entered the work force. The competitive nature of the labor market can be observed in the fact that “the average real earnings at a given age of male workers in the baby boom cohorts declined compared with those of immediately preceding cohorts” (Easterlin, Macdonald, and Macunovich: p. 283). The decrease in relative male earnings experienced by the baby-boom generation would lead one to believe that their generation would be relatively worse off economically than their parent’s generation. Yet, an analysis of just the relative earnings of males is misleading.
The income per adult equivalent (IAE) measure reveals that baby-boomers were in fact better off economically than their parents were. The IAE “is computed for each household by dividing the household’s total money income by the number of adult equivalents in the household. Following Fuchs (1986), the number of adult equivalents in a household is obtained by giving the first adult a value of 1.0 and all subsequent adults a value of 0.8, the first child a value of 0.4 and all others, 0.3” (Easterlin, Macdonald, and Macunovich: p. 279). It is important to note that the IAE measures income and wealth in terms of households not families. A measure of households instead of families includes non-married adults living together and other unrelated individuals that reside in the same household. It is a more complete measure of economic well being especially as the emphasis on family and marriage declined as the baby-boom generation matured. “The economic status of baby boomers, as measured by average real income per adult equivalent, has improved over that of their predecessors, despite the worsening of labor market conditions” (Easterlin, Macdonald, and Macunovich: p. 282). Some studies even observe that the baby boomers were about two-thirds better off than their parents’ cohort as measured by IAE (Easterlin, Schaefer and Macunovich: p. 501).
The baby boomers experienced an increase in net worth relative to their parents of a similar magnitude to that of the increase in IAE. “In 1989 at age 35-44 the boomer cohort of 1946-55 had an IAE 73 percent greater that those aged 35-44 in 1964, 25 years earlier. The net worth comparison spans a slightly longer 27-year period. If, to allow for this, one adjusts the IAE figures by the average growth rate of real per capita disposable income, then the excess of the boomers over their parents is increased to about 86 percent. This compares with a net worth difference of 114 percent” (Easterlin, Schaefer and Macunovich: p. 506).
The similarity in the magnitude of the increases in the relative economic well-being of the baby-boomers measured by both the IAE and net worth serve to underscore the accuracy of the data. Some of the increase relative economic status experienced by the baby boomers is attributable to a general increase in the relative prosperity of the population as a whole. However, much of it can be interpreted as a result of a variety of economic and demographic decisions made by the baby boomers themselves.
In order to explain how the baby boomers are better of economically relative to their parents despite a marked decrease in the relative income of male workers, one must examine the demographic decisions made by the baby boomers. The income life cycle hypothesis theorizes that demographic decisions are based on the income of a generation relative to their expected income. The baby-boomers, as they matured and entered the labor market, were relatively poor when compared with the expectations they had formed during their teenage years as a result of an increase in labor market competition.
They were able to narrow the gap between their actual and expected incomes through a variety of demographic decisions. One of these demographic decisions can be observed through the increase in the labor force participation of females. “Average earnings of boomer females, however, are more than three times those of females in the parental generation” (Easterlin, Schaefer, and Macunovich: p. 503). However, in order to increase their labor force participation, many females had to forgo or postpone having children. The average number of children per woman declined by about one-third (Easterlin, Schaefer, and Macunovich: p. 503). In order to overcome the adverse effects of a competitive labor market, many women made the decision to forgo childbirth in order to join the labor force and supplement their husband’s income.
Many baby-boomers, in response to the gap between their actual and expected income and their subsequent belief in their inability to support a family, never married. “Among the baby boomers, the proportion who have never married is projected to be considerably higher at retirement than was true of their parents…The trailing edge boomer cohort is projected to have close to 10 percent never-married at age 55-64, higher than the leading edge and almost double the proportion of the parental cohorts” (Easterlin, Schaefer, and Macunovich: p. 508).
Although the baby boom generation is markedly better off economically than their predecessors, they may have sacrificed their overall well being in order to achieve their prosperity.
The boomers may be adversely affected by their demographic decisions as they approach retirement and become increasingly dependent on others for economic and social support in their old age.
One indicator of the trade-off between low fertility and economic prosperity is the percentage of the baby boomers that will be living alone in retirement. “For the leading edge baby boomers, over a third of the cohort is projected to love alone at age 65-74. In contrast, the proportion among the parental generation of 1916-25 is less than one quarter and the proportion of the next parental cohort, that of 1926-35, is the lowest of all cohorts shown” (Easterlin, Schaefer, and Macunovich: p. 513). Because of their relatively low levels of fertility and marriage, and relatively high levels of divorce, the baby boomers will approach retirement alone in much greater numbers than their predecessors did. “In effect, an improvement in the economic status over that of their parents was purchased at the expense of family life” (Easterlin, Schaefer, and Macunovich: p. 513). The baby boomers compensated for the adverse labor market conditions they faced by decreasing their levels of marriage and fertility and many must face retirement with fewer family members to care for them or even alone.
The data appears to support the assertion that baby boomers experienced increased prosperity and lower fertility across all income lines. Since demographic decisions are based on a person’s income relative to the expectations that person formed during his youth, it stands to reason that both poor and affluent people would be affected similarly by the adverse labor conditions. An affluent and educated person, although wealthier in absolute terms when compared with a poor person, will still feel poor based on the high expectations that person formed during his youth in a wealthy environment. In short “those with higher average earnings typically come from more affluent backgrounds and have, in consequence, developed higher material aspirations” (Easterlin, Macdonald and Macunovich: p. 281).
Consequently, boomers in all income classes are less likely to have adult children and more likely to be living without a spouse than were their parental cohorts. “The greater inequality today among baby boom cohorts than their predecessors appears chiefly due simply to the fact that they participated in the general rise in inequality in the 1980s…This result conforms to our expectations that the demographic adjustments induced by economic pressures operate most clearly to affect the level of income” (Easterlin, Macdonald, and Macunovich: p. 287). The demographic decisions that the baby boomers made in the face of adverse labor market conditions affected their incomes relative to their parents not their peers.
When the generation born between 1946 and 1964 matured and entered the work force, they were faced with a decline in the relative earnings of male workers caused by increased labor market competition. In order to mitigate the effects of the adverse labor market conditions, the baby boomers were forced to make a series of demographic adjustments. They got married at later ages, if at all, and had fewer children. The decrease in fertility, coupled with a variety of other factors, including an increase in female wages and labor force participation, allowed the baby boomers to enjoy a level of economic prosperity that exceeded that of their parents’ generation. Although their economic well being increased relative to their parents, many would argue that their overall well being in terms of family life decreased. Their economic prosperity came at the expense of children and family. Therefore, a large number of baby boomers will be forced to face retirement without the financial and emotional support of adult children or a spouse.
Many members of the baby boom generation traded, in the face of adverse labor market conditions, the opportunity to raise a family in order to achieve a high level of economic prosperity.
Richard A. Easterlin, Christine M. Schaeffer and Diane J. Macunovich, "Will the Baby Boomers Be Less Well Off Than Their Parents? Income Wealth and Family Circumstances Over the Life Cycle in the United States" in Population and Development Review, Volume 19, Number 3, September 1993, pp. 497-522.
Richard A. Easterlin, Christine MacDonald and Diane J. Macunovich, "How Have American Baby Boomers Fared? Earnings and Economic Well-being of Young Adults", 1964-1987. In Journal of Population Economics, Vol. 3, 1990, pp. 277-290.