Intergenerational income mobility

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Intergenerationalincome mobility

• Prof. William A. Sundstrom
• November 9, 2004

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What is intergenerational mobility?

• Upward and downward mobility within generations
  and between generations
• Relative movement in the income distribution
• Intergenerational compare income over life cycle
  with ones parents
• The inverse of intergenerational correlation or
  persistence

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Measuringintergenerational mobility

• Empirical approach (Gary Solon)
• Use data to estimate correlation between, say,
  sons and fathers income
• Regression lnYson ßlnYfather controls
• Interpretation 1 ß captures mobility
  (regression to the mean)

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Regression line
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Estimates of ß

• Estimating ß using data need information on
  income of individuals and their parents
• Using one years income can be misleading due to
  year-to-year fluctuations
• Solon best estimate for U.S. is ß 0.4
• Is that high or low?

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Another way to measure it Transition
probabilities
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Other countries

• U.K. ß similar to U.S.
• ß much lower (mobility greater) in Canada,
  Finland, Sweden
• Why?

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Solons model ofintergenerational mobility
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Intergenerational correlation(ß) is greater if

• Income traits more heritable (e.g. more
  assortative mating)
• Higher return to human capital
• Less progressive government support of human
  capital
• How these apply in explaining international
  differences

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Intergenerationaltransmission mechanisms

• Genetics and family environment often hard to
  distinguish
• Surprisingly limited role of cognitive skills
  (IQ)
• Kids from advantaged backgrounds often get more
  and better schooling, but also better upbringing
• Importance of non-cognitive traits personality,
  looks, etc. What school can do for you.

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Equal opportunity

• Does Americas high ß mean there is actually less
  equality of opportunity here than in Finland?
• How does intergenerational mobility relate to
  equal opportunity?
• Different meanings of the term

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Conceptions of equal opportunity

• Procedural equal opportunity meritocracy
• Fair equal opportunity equal educational
  opportunities, eliminating disadvantages
  associated with social or economic background
• Where do you draw the line in leveling the
  playing field?
• How equal are opportunities?

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Equal opportunity andintergenerational mobility

• The relationship is complex
• Even with fair equal opportunity, ß could be
  high, due to factors that cannot be equalized
• Conversely, even without equal opportunity, ß
  could be low if policies strongly redistribute
  income
• Relate to Solons model

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Equal opportunity cont.

• The importance of the family in determining
  traits and future income potential blurs the
  distinction between equality of opportunity and
  equality of outcomes
• Policies to create a truly level playing field
  could be more costly and invasive than policies
  yielding equal outcomes

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Fair equal opportunityin practice

• We have some evidence that early childhood
  interventions can work
• Perry Preschool experiment
• Cost per kid (age 3-4) 12,000
• Estimated lifetime benefit per kid 43,000
• Sources of benefits increased earnings and crime
  reduction