Friday, October 25, 2013

The Crowding Effect

"Birth-year cohort effects" explain why Americans born in the 1930s and 1940s have done better economically than those born in the 1950s and later, according to a study by the Federal Reserve Bank of St. Louis. In other words, size matters.

Turns out, being a member of a small generation can be good for the pocketbook. The baby bust of the Great Depression and World War II resulted in a small birth cohort that, because of its scarcity, enjoyed a lifetime of relatively higher earnings, lower house prices, and strong growth in asset prices compared to the bigger birth cohorts that came before and after. That explains why the large baby-boom generation doesn't measure up—it's the crowding effect. "It is plausible that Baby Boomers may have suffered from crowding in labor, housing, and financial markets," say the Fed researchers. "This may have resulted in unfavorable developments in income and wealth accumulation."

Unfortunately for boomers, the crowding effect is a life sentence: "It appears unlikely to us that Baby Boomers—who are just now entering retirement in large numbers—will enjoy incomes and wealth for given demographic characteristics as favorable as that enjoyed by pre-boomers," conclude the researchers.

Source: Federal Reserve Bank of St. Louis, Center for Household Financial Stability Working Paper, The Economic and Financial Status of Older Americans: Trends and Prospects

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