zero day finance we need to talk about millennial income inequality

We Need To Talk About Millennial Income Inequality

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:

  1. How much money will this employee generate?
  2. 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.

We Need to talk about the millennial income gap

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.

Good Hunting,
David


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13 thoughts to “We Need To Talk About Millennial Income Inequality”

  1. I’m not sure how meaningful the metric is. A millennial is anyone from 21 to 34 give or take. By it’s very nature your going to see a significant striation in this age range. Your twenties typically represent the period with the highest income growth. Also those dumping into the job market differ in age ranges. For example a doctor is making nothing for most of their 20s the typically hockey sticks. Millennials will see the same overall ramping over time. It’s still an exponential curve of course, but by it’s nature the twenties will always have the biggest such curve.

    1. Absolutely, Millennials are hopefully at the lowest end of their earning curves. I was hoping the bottom, maybe 10% or so would be where it’s at now (figure those are college students working part time), and then we would see an increased slope for the middle 50-60%, and than a much higher slope for the top 25%. That way at least there is a road map to get to $50,000 or so a year. Instead, its pretty much constant until 75%, and then it increases very rapidly as it hits the exponential.

  2. First, thanks for the mention! (Plug: Anyone looking to up their giving game in 2017 should come to my site and pile on my donations. I’ll match $5 for everyone reader who does!) David, Glad you will be considering giving a bit more when you can.

    Second, I know this income inequality issue presents itself across the entire economy, hitting all age groups and named generations. Wage stagnation is too real for most Americans, except for CEO top-tier executives who are pulling away from the other 99.9% at an alarming rate.

    In terms of personal income growth, I feel there are lots of variables to get right before zooming up that curve from DQYDJ (amazing site by the way, right?!). I don’t quite have an opinion on it, but I know for myself complacency (or possible contentedness) and the abandonment of office politics played a role. Of course, sticking to my first job for ~8 years also played a negative effect on my current income. (Now I’m just streaming from my brain, but “baby-boomers” hold on a large # of jobs could be holding the next generations down. (And what ever happened to Gen X?))

    1. You’re welcome! I really like what you’re doing on your blog.

      Yeah the income gap definitely impacts the entire economy. I don’t have very useful data for the economy as a whole, and I think that data might be harder to interpret. 18 – 65 years old would probably be the best data. I’d be interested in seeing the data for everyone. My best guess would have the same distribution below the exponential inflection point, but the max income would skyrocket to maybe $400,000 per year for 99%.

      I really want to believe that personal growth, either by learning new things or “kicking ass” at your job will drastically improve your income, I just can’t see it for anything more than a negligible part of the population. There will always be people who do really well, climb the ladder and see themselves move from the 10th percentile to the 90th. But I don’t think that is any more than negligible. I don’t know if it is overall laziness, that probably contributes. My guess is more structural in nature. You go to work for 50 hours a week, feel drained and don’t push yourself to learn at home, and your career becomes a job.

  3. Great post. I agree, the income gap is a real issue for many millennials. It’s sad because most of them don’t realize how the gap will affect them until it’s too late and they are unable to make up the difference later in life. As you said, those who are in the lower percentiles will have a difficult time retiring and living comfortably and some may never be able to retire at all depending on the amount of debt they carry into retirement. I also liked how you mentioned that those with good jobs should give back to their community. Many wealthy people are on the continuous hunt to increase income and wealth, and there is nothing wrong with that, but giving back to the community and those less fortunate is extremely important! My husband and I are always looking for different ways to contribute and give back to the community.

    1. Thank you! You’re right, most people won’t realize until its too late.

      I’m glad that you are looking at ways to give back to the community. I need to figure out how to do that best. I’m planning on making donations to cancer research organizations, and local homeless shelters. May as well help out the most vulnerable. Maybe giving back in ways to the community, based on how I was helped. Local scholarships, etc.

  4. Thanks for the analysis David. I am sure that number is skewed higher for those reading this.

    I think the 22 year old making $18K would be too tired and drained to read money stuff.

    Funny just today on the bus, I overheard a girl talking about student loans (she’s going to be in it for $40K and was looking at what limited scholarships there are for those who are untraditional students.) I kind of wanted to shake her and say don’t do it. $40K is a lot of money to owe someone. But you know…strangers on buses shouldn’t do that.

    When I was working I made $40-60K and it sounds good but in San Francisco that’s pretty much like $30K elsewhere. So I was your average millennial. Luckily hubby does well enough. Can’t tell you how blessed it is and how scary it is for others. I don’t even want to think about it…

    1. It is very difficult for the average Millennial, really the average person to get ahead. With the average U.S. income of $38,000, it feels like most people can never get ahead. And you can see some of the ramifications of this, like 50% of Americans cannot come up with $400 without a loan.

      Student loans are really screwing Millennials. I luckily only graduated with $15k, but the average is closer to $35k, all so they can earn small salaries and hopefully pay it off in 10 years.

  5. Just seeing this article, and I really like that you advocate giving back to your local (or not so local) charity. There’s so many places that need assistance, even it’s just a few hours of volunteer time. The only thing I disagreed with on the income gap was your scenario didn’t really address the 2nd question of: “How much do I need to pay this person to stay?”. If someone was stuck with a low salary, and new hires for the same position were making 50% more than them, wouldn’t they look for work at a different company in the same field? (Since starting wages were significantly higher than they were making) I liked this post a lot, and gave me a lot to think about, thanks!

    1. Thank you, shortly after writing this post, I started a campaign to donate more to charity and I’m at 33% of my goal for this year. There are countless millions who could put the money to better use than me.

      Often times, people are stuck in a low salary and they might not know what their coworkers are making. Regardless, staying with their same company will only lead to a continued low salary because your company won’t magically pay you more just because everyone else is. The biggest detriment to a low starting salary is the fact that even a modest increase will keep you below everyone else. You might make $50k and everyone else $70k. If you apply for another job you might be offered a 20% raise! But that only brings you to $60k. Most people don’t have the negotiation skills or the self worth and determination to get a proper salary in a negotiation which is unfortunate.

      Thank you for liking this post, I hope you come back for more!

  6. I feel privileged to be sitting at about 85% on your graph, I know I am much better off than so many others and that is why you see the ‘give’ category on my goal report each month.

    I got there with a mix of determination, hard work and maybe a bit of luck. I wish more millennials understood their worth and weren’t afraid to negotiate to get it. A small increase at the start will be worth so much more further down the line.

    1. Absolutely, I made sure to negotiate hard for my first job, and my second job. Those two negotiations are worth more than $10,000/year at this point. I’m pretty high up on the right side of the graph. I do my best to help out people to my left, and I’m definitely donating more money. I’ve already done $500 this year, my goal is another $1,000. Then net year will be about $2,000. Definitely channeling my inner zencents

  7. That’s great. I also look for ways to give back that aren’t necessarily monetary. Helping people with a skill I have that they don’t, donating time to charities or events, cooking meals for those in need etc.
    Well done for continuing to increase how much you give back 🙂

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