The Kids Are Alright as U.S. Job, Wage Gains Reach Millennials

Wage gains for the young may also precede stronger earnings growth for older workers

Millennials Finally Moving Out of Their Parents' Homes

The kids just might be alright.

America’s young adults are finally showing signs of regaining their economic footing after being bogged down for more than five years following the worst recession since World War II. Employment prospects for the millennial generation are improving, their incomes are rising and more are leaving their parents’ home to set out on their own.

With millennials projected to overtake baby boomers this year as the biggest generation in the U.S., sustained earnings and employment growth will go a long way in fortifying the economy. In addition to helping whittle down student-loan debt and cover rising housing costs, wage gains among those born after 1980 also could potentially boost pay for all workers.

“Income is probably the most notable area of improvement” for millennials recently, said Sarah House, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “We’re going to need to see the expansion continue for a while” to keep strengthening their financial positions, she said.

The number of millennials is expected to reach 75.3 million in 2015, surpassing the 74.9 million baby boomers, or those born between 1946 and 1964, according to Pew Research Center in Washington.

The employment rate for 25 to 34 year-olds stood at 76.6 percent in January, the highest since December 2008, according to data from the Labor Department.

What’s more, a precipitous drop in labor force participation among the age group shows signs of stabilizing. The share of 25 to 34 year-olds employed or looking for work was 81.4 percent last month, up from a 32-year low of 80.5 percent in October 2013.

Rising Faster

The increase in employment among the cohort is being accompanied by higher pay. After taking a huge hit during and immediately following the recession, earnings for millennials -- especially the youngest -- are rising faster than those of older age groups.

An analysis by Wells Fargo showed the four-quarter moving average of median weekly earnings for 16 to 24-year-olds was 4.8 percent higher in the final three months of 2014 than a year earlier, the strongest advance of any age group. That was followed by a 2.4 percent increase for 25 to 34 year-olds and compares with a 1.7 percent gain by 45 to 54 year-olds and a 0.8 percent increase for 35 to 44 year-olds.

Source: Wells Fargo Securities LLC

“We’ve seen a substantial pickup in wages for these young workers,” House said. “There is a little bit of catch-up going on.”

Labor Market

The progress is probably owed to a labor market that last year was the strongest since 1999, according to Labor Department data. A 257,000 increase in January capped the biggest three-month advance in payrolls in 17 years.

Wages for all workers have been slow to follow suit. Average hourly earnings rose 2.2 percent in January from the same month last year. While that was the biggest year-over-year gain in five months, it’s far from the 3 percent to 4 percent Federal Reserve Chair Janet Yellen has indicated is typical.

Faster wage growth among young adults could signal similar gains for other workers, said Gad Levanon, managing director of macroeconomic and labor market research for the Conference Board in New York. His research has also shown that younger workers have recently seen average income increases that exceed that of the broader population, reversing the trend during recession when their pay slumped.

Education Benefits

Those with bachelor’s degrees are experiencing the largest gains, with wage growth averaging 4 percent in 2014 for 21 to 25 year-olds, according to Levanon’s calculations using figures from the current population survey, produced using Census and Bureau of Labor Statistics data. It was 2 percent for same-age workers without a college degree and compares with 1.6 percent for the entire working population, regardless of education.

Source: Conference Board

The data also confirm what other research has shown: more education is correlated with higher rates of productivity and pay. Still, almost 40 percent of households headed by adults younger than 40 years old had some student debt as of last year, according to Pew, meaning that a portion or all of the extra income will likely go to pay off those loans.

In the previous expansion, bigger wage gains among younger adults preceded an income pickup for the overall workforce, Levanon found. Until recently, companies were able to hire from a large stock of young unemployed Americans who commanded lower wages, which helped hold down total employment costs, he said. Now, some of that slack is being diminished.

Bargaining Power

“When this pool of young workers is not so large and cheap anymore, employers’ bargaining power is weaker and they can’t tap into that pool as easily as they did before,” Levanon said. “That raises the wages of the entire workforce.”

More jobs and higher pay also sets the stage for stronger demand for housing. The number of households grew by 1.66 million in the fourth quarter from a year earlier, the biggest annual gain since 2004, according to data from the Census Bureau. The increase was driven by a jump in rental units as homeownership fell from a year earlier.

The pickup may be a sign that millennials are striking out on their own and finally moving out of their families’ or friends’ homes, said Jed Kolko, chief economist for San Francisco-based real estate researcher Trulia Inc. If it continues, the trend would boost prospects for both consumer spending and construction.

Mom & Dad

While the data are volatile, “there’s been an increase in the share of young adults who are working, and young adults with jobs are much less likely to live with their parents than those without jobs,” Kolko said.

George Panagiotopoulos, a 25-year-old who works for a research-based consulting firm, has seen the improvement in wages first hand. Panagiotopoulos said he received two raises last year, representing a 16 percent salary boost.

He used the first pay increase, in January 2014, to move out of his parents’ house and into his own apartment, which has a balcony and a sixth-floor view of downtown Stamford, Connecticut. He said he’s using the rest to “put a more serious dent in undergraduate student loans.

‘‘I think the job market is warming up to us again,’’ Panagiotopoulos said, adding that his employer was hiring workers right out of college. ‘‘The value of your work has increased’’ as the economy as improved, he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE