Academic journal article Chicago Fed Letter

Is Intergenerational Economic Mobility Lower Now Than in the Past?

Academic journal article Chicago Fed Letter

Is Intergenerational Economic Mobility Lower Now Than in the Past?

Article excerpt

This article presents evidence on long-term trends in intergenerational economic mobility in the United States and considers the prospects for intergenerational mobility going forward.

In the wake of the Great Recession and the growth in income inequality over recent decades in die United States, die degree of economic mobility over generations has become an increasingly salient issue. A recent New York Times article highlighted the growing evidence showing that intergenerational economic mobility appears to be lower in the United States than in other advanced countries.1 President Obama and Republican presidential candidates have also referenced intergenerational mobility as being an issue of concern.2 One dimension of this issue that is not well understood, however, is whether intergenerational mobility has been changing over time and whether the prospects for mobility have been hampered for children growing up in families that have been hard hit by the recent economic downturn.

This Chicago Fed Letter discusses some of the research on trends in intergenerational mobility. I begin by describing how intergenerational economic mobility is commonly measured and show that, conceptually, it is a "backwards-looking" measure that describes the mobility experience of individuals born decades earlier. I then discuss two distinct approaches I have used in previous studies to study long-term trends in intergenerational mobility. After staying relatively stable for several decades, intergenerational mobility appears to have declined sharply at some point between 1980 and 1990, a period in which both income inequality and the economic returns to education rose sharply. This finding is also consistent with theoretical models of intergenerational mobility that emphasize the role of human capital formation. There is fairly consistent evidence that intergenerational mobility has stayed roughly constant since 1990 but remains below the rates of mobility experienced from 1950 to 1980.

Although we cannot say with any certainty how much mobility today's children will experience over the coming decades, recent research suggests cause for concern. The gap in children's academic performance between high- and low-income families has widened significantly over the last few decades. If this trend persists, it would point to reduced intergenerational economic mobility going forward.

Economic models and measures of intergenerational mobility

Before discussing trends in intergenerational economic mobility, it may be useful to explain how economists think about intergenerational mobility and why it might have changed over time. Economic models have emphasized the importance of parental investment in children's human capital as one of the key mechanisms behind the intergenerational transmission of labor market earnings. One such model developed by Solon3 points to at least two important factors that could cause intergenerational mobility to change over time: changes in the labor market returns to education and changes in the public provision of human capital. In periods where the returns to schooling are rising, the payoff to a given level of parental investment in children's human capital will be larger, causing differences between families to persist longer and leading to a decline in intergenerational mobility. In contrast, during periods where public access to schooling becomes more widely available, then one might expect the intergenerational association to decline and mobility to rise.

The most commonly used measure of intergenerational mobility is the "intergenerational income elasticity," which captures the association between the income of a child (in adulthood) and the income of his or her parent.4 Both incomes are measured in logs so that the association can be interpreted in percentage terms. An intergenerational elasticity of 0.5, for example, implies that if a father's income was 10% above the mean in one generation, we would expect the son's income in the next generation to be 5% above the mean. …

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