Intergenerational Income Mobility

[Stephen Bezruchka]

The American Dream, instilled in books for children in the 1800s by
Horatio Alger, and continued to this day is the "if you work hard enough,
you can get rich".  In the past, this was a little more possible than
today.  Here is a summary of recent studies confirming this.  Has profound
health implications.  The best individual health advice remains:  choose
your parents carefully.  STephen

*****
NYT November 14, 2002 The Apple Falls Close to the Tree By ALAN B. KRUEGER

It seems increasingly apparent that the secret to success is to have a
successful parent. Consider some prominent examples: George H. W. Bush and
George W. Bush; Bobby Bonds and Barry Bonds; Henry Fonda and Jane Fonda;
Este Lauder and Ronald Lauder; Julio Iglesias and Enrique Iglesias; Sam
Walton and Jim, John, S. Robson and Alice Walton.

As more recent and better data have become available, economists have
marked up their estimate of the impact of parents' socioeconomic status on
their children's likelihood of economic success.

It turns out that the famous line attributed to Andrew Carnegie -- "from
shirt-sleeves to shirt-sleeves in three generations" -- is an
understatement. Five or six generations are probably required, on average,
to erase the advantages or disadvantages of one's economic origins.

This represents a marked departure from past thinking. In the 1980's, when
Gary S. Becker of the University of Chicago pioneered the economic theory
of intergenerational transmission of economic status, it was believed that
the correlation between a father's and son's income was only around 0.15
-- less than half the correlation between fathers' and sons' heights.

The early studies suggested that if a father's income was twice the
average, his son's expected income would be 15 percent above average, and
his grandson's just 2 percent above average. This is fast "regression to
the mean," a concept Sir Francis Galton used to describe the progression
of offspring toward the average height.

Landmark studies published by Gary Solon of the University of Michigan and
David J. Zimmerman of Williams College in The American Economic Review a
decade ago, however, led economists to revise substantially upward the
estimate of the similarity of fathers' and sons' incomes. They noted that
income fluctuated for idiosyncratic reasons from year to year -- an
employee could lose a job, for example -- so estimates that depended on a
single year were based on "noisy" data. Also, the samples previously
analyzed represented only a narrow slice of the population at different
points in individual careers. These factors caused the correlation in
annual incomes to understate the correlation in "lifetime" incomes.

Averaging earnings over five years produced a correlation of around 0.40
for fathers' and sons' earnings -- the same as the correlation between
their heights. If people's incomes were represented by their heights, the
similarity in income between generations would resemble the similarity
observed in the heights of fathers and sons.

New studies by Bhashkar Mazumder of the Federal Reserve Bank of Chicago
suggest that the similarity in income is even greater. Using Social
Security records, he averaged fathers' earnings over 16 years (1970
through 1985) and sons' earnings over four years (1995 through 1998), and
found that around 65 percent of the earnings advantage of fathers was
transmitted to sons. The wider window provides a better reflection of
lifetime earnings.

The relationship between fathers' and daughters' earnings was just as
strong.

So that grandson (or granddaughter) mentioned previously could expect to
earn 42 percent more than average. After five generations, the earnings
advantage would still be 12 percent.

Furthermore, the degree of persistence across generations is strong for
both rich and poor. Thomas Hertz of American University finds that a child
born in the bottom 10 percent of families ranked by income has a 31
percent chance of ending up there as an adult and a 51 percent chance of
ending up in the bottom 20 percent, while one born in the top 10 percent
has a 30 percent chance of staying there and a 43 percent chance of being
in the top 20 percent.

In another study, David I. Levine of Berkeley and Dr. Mazumder found that
the impact of parental income on adult sons' income increased from 1980 to
the early 1990's.

Why is there such a strong connection between parents' socioeconomic
status and their children's? A large part of the answer involves
intergenerational transmission of cognitive ability and educational level.

But these factors can "explain at most three-fifths of the
intergenerational transmission of economic status," Samuel Bowles and
Herbert Gintis of the University of Massachusetts wrote in the latest
issue of The Journal of Economic Perspectives. They suggest that the
intergenerational transmission of race, geographical location, height,
beauty, health status and personality also plays a significant role.

Arthur S. Goldberger of the University of Wisconsin has long questioned
whether knowledge of the "heritability" of income is of much use. Even if
the father-son correlation is high because traits that affect earning
power are inherited, well-designed interventions could still be cost
effective and improve the lot of the disadvantaged.

To take an extreme example, the correlation in incomes between fathers and
sons was high in South Africa under apartheid because race is an inherited
trait. The abolition of apartheid reduced the correlation. The
organization of society matters.

Perhaps the only legitimate use of the intergenerational correlation in
income is to characterize economic mobility. The data challenge the notion
that the United States is an exceptionally mobile society. If the United
States stands out in comparison with other countries, it is in having a
more static distribution of income across generations with fewer
opportunities for advancement.

Anders Bjrklund of Stockholm University and Markus Jntti of the University
of Tampere in Finland, for example, find more economic mobility in Sweden
than in the United States. Only South Africa and Britain have as little
mobility across generations as the United States.

Luke Skywalker and Darth Vader are an unusual father-son pair; in most
families, the apple does not fall so far from the tree.