Academic journal article Brookings Papers on Economic Activity

Income Inequality, Social Mobility, and the Decision to Drop out of High School

Academic journal article Brookings Papers on Economic Activity

Income Inequality, Social Mobility, and the Decision to Drop out of High School

Article excerpt

ABSTRACT It is widely documented that places with higher levels of income inequality have lower rates of social mobility. But it is an open question whether and how higher levels of inequality actually lead to lower rates of mobility. We propose that one channel through which higher rates of income inequality might lead to lower rates of upward mobility is lower rates of human capital investment among low-income individuals. Specifically, we posit that greater levels of income inequality could lead low-income youth to perceive a lower rate of return on investment in their own human capital. Such an effect would offset any potential "aspirational" effect coming from higher educational wage premiums. The data are consistent with this prediction: Individuals from low socioeconomic backgrounds are more likely to drop out of school if they live in a place with a greater gap between the bottom and middle of the income distribution. This finding is robust in relation to a number of specification checks and tests for confounding factors. This analysis offers an explanation for how income inequality might lead to a perpetuation of economic disadvantage, and it has implications for the types of interventions and programs that would effectively promote upward mobility among youth of low socioeconomic status.

International comparisons show that the United States is a country that ranks high in its level of income inequality and low in its level of social mobility. Miles Corak (2006)--building on the theoretical contributions made by Gary Solon (2004)--was the first to show empirically that this relationship is part of a broader pattern that exists across countries. Countries with high levels of inequality also tend to exhibit lower rates of social mobility, as measured by greater intergenerational income persistence.

Alan Krueger (2012) popularized this relationship as the "Great Gatsby Curve." Using data on the 50 states, we construct a Great Gatsby Curve for the United States. Figure 1 shows that states with greater levels of income inequality tend to have lower rates of social mobility. (1) This positive cross-sectional relationship between rates of income inequality and intergenerational income persistence often leads to claims about causality, implying that higher rates of income inequality lead to lower rates of mobility. (2) However, it is very much an open question as to whether income inequality actually causes lower rates of social mobility, and if so, through what channels.

In this paper we propose, and investigate, one important channel--curtailed investment in human capital--through which higher rates of income inequality might lead to lower rates of upward economic mobility for individuals from backgrounds of low socioeconomic status (SES). We hypothesize that income inequality can negatively affect the perceived returns on investment in education from the perspective of an economically disadvantaged adolescent, either through an effect on actual returns or through an additional effect on the perception of these returns. The notion we have in mind is that a greater gap between the bottom and the middle of the income distribution might lead to a heightened sense of economic marginalization, such that an adolescent at the bottom of the income distribution does not see much value in investing in his or her human capital. We call this "economic despair." This could be due to adverse neighborhood or school conditions driven by elevated rates of income inequality, but it need not be. This mechanism offers an explanation within the standard human capital framework of decisionmaking for why greater inequality--which might reflect in part a greater return on human capital investment--does not necessarily lead to greater rates of educational attainment for certain segments of the population.

To empirically explore this idea, we investigate whether places characterized by higher rates of income inequality have situations that lead to lower rates of high school graduation among individuals from low-SES families, controlling for individual and family demographics and broader contextual factors. …

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