Timing is everything: How the fallout from covid-19 will affect the young
The immediate impact of the corona virus on the young is only now playing out: schools and universities have closed, many of their parents will have lost their jobs or face uncertainty about future income, and for the first time in their lives will have faced shortages for basic goods like pasta, rice and toilet rolls.
The second order effects are still anyone’s guess but some things have increased in probability over recent weeks. We are in a deep recession, if not an outright depression. As supply chains have broken down and governments have flooded the economy with money, inflation looks increasingly likely. Finally, there is the prospect of some profound changes in both society and political environment over the next few years — positive or negative is still very much unknown.
The formative years between age 16 and 25 tend to have a lasting influence. Their income growth, how successful their marriage turns out, the number of children they have and their investment decisions. Lets look at each in turn.
Income and employment
Whereas older workers can (assuming they keep their job) weather the storm that a weak labour market presents by staying in their job. Young workers do not have that luxury. Job opportunities dry up during a recession and so opportunities for early career advancement go missing at a crucial stage in their development — both professionally but also personally (e.g. family formation).
The wage penalty from a recession can last for years — a phenomenon economists call wage “scarring”. Lack of access to work experience means young workers cannot gain valuable skills with which they can use to leverage a pay rise or attract the attention of another employer.
The covid-19 recession has affected all businesses. Mostly negatively, some positively. In the early stages of the pandemic food retailers benefited from peoples propensity to hoard, but there’s no guarantee it will stay that way. Digital businesses such as video conferencing have also benefited.
The young graduating into the workforce over the next year or two face a number of challenges. On the one hand the uncertainty may lead them to seek certainty (becoming a civil servant or an epidemiologist say), or it may lead them to seek opportunity. Some of the technological innovations and business that we use today were born in the economic and social challenges of a recession.
Studies have shown for example that our attitudes towards recessions and inflation are shaped to a large extent in our formative years and these memories influence our investment decisions for life.
If your formative years were marked by media stories of stockmarket crashes and the risk of financial contagion then you are going to lack trust in the equity market and the broader financial system. That’s what happened post 2009 as the generation coming of age during that time migrated to Bitcoin and largely failed to invest in equities.
If the background to your formative years involved a bull market in equities and a long and prolonged decline in interest rates — the experience of most 40 year olds — then your portfolio is likely to be heavily exposed to the equity market.
How will those 16–25 year old’s react to the asset market of 2020? Only one asset has down well so far this year. Gold. Time will tell whether that has influenced their investment decisions. It may turn out to be a good one if inflation rears it head and the financial system is reset.
Until now, it has been assumed that the scars from recessions are mainly economic, affecting workers’ employment, income and wealth. But new research by Hannes Schwandt of Northwestern University and Till von Wachter of the University of California, Los Angeles suggests that economic downturns can have other long-lasting effects.
Using data on the roughly 4 million Americans who entered the workforce shortly before, during and after the 1982 recession — when unemployment reached almost 11% — the authors measured how the downturn affected those people’s health and mortality many years later.
The poor economic environment and weak job prospects following the 1982 recession resulted in a cut in the life expectancy of those entering the workforce of some six to nine months. The additional deaths were from causes linked to unhealthy behaviour, including heart disease, lung cancer, liver disease and drug poisoning.
Attitudes to alcohol, drugs and diet have evolved significantly since the 1980’s. Indeed, the pace of change over the past decade has been nothing short of seismic, especially among the millennial generation. Post covid-19 one could make the case that attitudes towards basic hygiene (washing hands for 20 seconds) and the need to maintain a strong immune system will have such a lasting impact that our young will be the healthiest generation ever.
The mental health of the young is another thing to worry about. My 9 year old son was initially scared by the powerful images being reported out of China. But just as a recession becomes a depression when you lose your job, the mental wounds from covid-19 may only appear if or when a family member, neighbour or friend succumbs to the virus. The evidence from natural disasters and other traumatic events suggests that children are remarkably resilient, but of course that doesn’t mean everyone has the same experience of the event. Disadvantaged children face a bigger challenge.
Starting work during the recession also damaged marriages. People who entered the labour force around 1982 were more likely to get divorced (their split-up rates were about 3.5% above the average). By middle age, they were also roughly 3–4% less likely to have children).
Anecdotal evidence from China points towards a rise in divorce proceedings. Families not used to spending so much time together, are now quarantined together for months. The Christmas holidays tends to result in an increase in the divorce rate early in the new year. Christmas allows couples to go some space — if only to meet their friends down the pub. Christmas comes to an end soon enough. Quarantine may last weeks without a defined date when everything gets back to normal.
The young also face weeks or months away from the social contact they would have received at school. Video calls allow some form of interaction, but they will always be a poor substitute for the real thing.
Nothing is set in stone of course. The fallout from covid-19 does not mean a life sentence for the young. We can all do our bit to guide the young through this period. What is clear though is that at least for the aggregate the corona virus will leave long-lasting scars.