– April 28, 2016

We imagine a world where our lot in life is tied to our own talents and initiative, rather than our parentage.

We can measure our progress toward this goal: Intergenerational Income Mobility is the extent to which parental income levels are correlated to that of their children when the children are grown.  

In the United States, the data shows we still have a ways to go to realize this dream.

Economists measure intergenerational mobility by estimating intergenerational income elasticity (IGE) between parents and grown children.

This is a number ranging from zero to one, where an estimate of one means that children’s income levels will be in exactly the same spot on the income distribution scale as were their parents (i.e. the child of a “one-percenter” will be a “one-percenter”; the child of impoverished parents will be impoverished). An IGE measure of zero means there is no parent-child income relationship.

This can move in either direction. It does not measure whether children are better off than their parents; it simply measures how close a grown child’s income correlates to that of their parents.

An IGE measure of, say, 0.5, means that the child of a parent whose income is $20,000 below the average would be expected (all else equal) to have an income level in adulthood that is $10,000 below the average. And a child of a parent whose income is $20,000 above the average would be expected to have an income of $10,000 above the average.

High intergenerational elasticity (low intergenerational mobility) is a concern for anyone worried about increasing levels of inequality.

It is perhaps not surprising that top economists have found the United States to have some of the highest  estimates in the developed world (0.4-0.6). Indeed, data suggest that an American’s lot in life is much less influenced her productivity, work ethic, determination, etc., and much more so by whom her parents are.

Compare this to the U.K. where estimates are closer to 0.3, and Nordic countries (Denmark, Norway, Finland, and Sweden) where IGE estimates are less than 0.3. This should be disconcerting for anyone who believes in the meritocratic aspects of American capitalism.

So why is intergenerational mobility relatively low in the United States? Some of the world’s most influential economists have turned their attention to this question, and although the answer is not completely clear, there is evidence of some very strong indicators. I focus my attention on one.

Perhaps the most intuitive mechanism through which income levels are transmitted across generations is education. Parents with relatively high levels of education also have relatively high levels of income. Therefore, these parents are more able to provide financial access to education to their child, which in turn, increases the child’s adulthood income level. This is called the “selection” effect of education on IGE.

It is also possible that parents with high levels of education pass on specific traits to their children that cause the children to pursue higher levels of education, independent of parental income. This is called the “causation” effect of education.

Deciphering the relative sizes of the “selection” and “causation” effect of education on IGE is of great importance as it pertains to economic policy. If, for example, the “selection” effect is very large, this suggests that increased public expenditure on education could reduce IGE and level the playing field.

This possibility is supported by recent research that finds that, over 10 developed economies, IGE estimates decrease as the percentage of GDP spent on public education increases (Ichino, et. al., 2009); and, in areas in the U.S. in which public expenditure on education is relatively low, IGE estimates are higher (Mayer & Lopoo, 2008).

On the other hand, if the “causation” effect is the driving mechanism, then there is less of a role for public policy and perhaps a larger role for parents to do things that support and strengthen their child’s education. Whatever the larger of the two effects, a cause of high intergenerational income transmission in the U.S. seems to be high intergenerational education transmission.  Policymakers, students, and parents take note.

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Tristan Coughlin

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