Working Millennials have a huge problem: income. As millennials, we graduated from college in the worst job market in a generation. There were very few open jobs, and the competition for these few jobs was intense. This created a scenario where anyone would take a job, regardless of the salary. Fast forward several years and the economy has made great progress. Companies are making profits and the unemployment rate is the lowest that it’s been in decades. Unfortunately, incomes haven’t improved very much, and that is hitting Millennials very hard. Even Millennials who are in a high income percentile are still doing poorly, due to Millennial income inequality.
How Is Income Determined
Every company needs to make money. The owners take a very large risk, and they wouldn’t take this risk without a potential reward. When they decide to hire an employee, they need to examine 2 parameters when determining their salary:
- How much money will this employee generate?
- How much money do I need to pay them to stay?
Unfortunately, these two questions lead companies to minimize employee salaries. During the Great Recession, the answer to question 1 was low. People weren’t spending money because they didn’t have any to spend. The answer to question 2 was very low. People would work for anything, because any salary is better than being unemployed. These two factors lead to the majority of Millennials taking jobs that didn’t pay particularly well. The effects of taking a very low starting salary right out of college will impact the rest of your life.
If your first salary is low, all of your future pay increases will be small because they are based on a small starting salary. When you change jobs, you might get a great pay increase of 25%, but your pay can still be less than 50% of what new hires in those positions are making.
The Millennial Income Gap
The following graph was built using data from Don’t Quit Your Day Job. They run a fantastic, data-driven financial blog and I would recommend everyone to check out their content. This graph shows the average income for each Millennial income percentile.
Not all Millennials do poorly. As usual, there will always be a small percentage of people who do extremely well. A problem arises when there is a sub-optimal distribution of income that places the majority of the population in poverty, while a few people at the top live in extreme luxury. If someone asked me what an “optimal” income distribution looks like, I wouldn’t be able to answer. However, I would hope that the exponential component of the graph (the slope of the graph increases significantly, around 85%) is less severe, and farther to the left.
If we examine the above graph, we can see that the 50th percentile, the “average Millennial,” makes about $30,000 a year. That is enough money to survive and save a little bit, but barely. They do very well compared to the 25th percentile, who makes about $18,000 a year. It is extremely difficult, if not impossible, to live on that amount of money. But, 25% of Millennials do. If we look to the right side of the graph, the 90th percentile is making around $70,000, more than double the “average Millennial,” but still less than half of the 99th percentile who earn a very plush $175,000.
I personally consider $50,000 to be the gold standard of income. If you make that much money, you can find a reasonable apartment and still manage to max out your Roth IRA. If you max out your Roth IRA, you can retire at age 65 with $1 million in the bank, and enjoy $40,000 a year in dividends + social security. Unfortunately, 77% of Millennials make less than this, and their incomes probably won’t keep up with the rising cost of living. Will they ever be able to retire?
Why Is The Millennial Income Gap Bad?
On the surface, it can be easy to discount the graph. There are obviously many people who work very hard and produce massive profits for their companies. But how much harder are they working than the Millennials stuck in minimum wage jobs, making $14,000 per year? Are they working 10 times harder? Probably not.
The real reason this is bad is that it’s a bad omen for our future. When its our turn to retire in a few decades, will 77% of the people not be able to afford it? Will they have to work forever? That is a truly depressing thought. You should enjoy your life, not be a slave to the American economy for 60 years and then die.
Should I Feel Bad If I Make A Lot Of Money?
No, you shouldn’t. If you make a lot of money, you should feel good about yourself because you’ve made it. But I hope that you now understand that tens of millions of people haven’t made it, and probably never will. If you are above the 90th Millennial income percentile and enjoy a very relaxing life, I would hope that you give back to your community. Volunteer at local homeless shelters. If you want to donate to local food banks, write them a check. They can purchase food much cheaper than you can. Finally, you can always give to charity. Zed from ZenCents has convinced me that I need to do this more than I am right now.
I hope that you have learned something from this post. If you are high up on the income scale, I hope that you will give back to your communities, and help out people less fortunate than yourself.
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