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ESSAYS ON ISSUES THE FEDERAL RESERVE BANK OF CHICAGO APRIL 2012 NUMBER 297 Chicago Fed Letter Is intergenerational economic mobility lower now than in the past? by Bhashkar Mazumder, senior economist 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 the United States, the degree of economic mobility over generations has become an increasingly salient issue. A recent New York Times article 1. Returns to college and intergenerational elasticity highlighted the growintergenerational elasticity returns to college ing evidence showing 0.14 0.6 that intergenerational economic mobility 0.12 0.5 appears to be lower 0.10 in the United States 0.4 than in other ad0.08 vanced countries.1 0.3 President Obama 0.06 and Republican pres0.2 0.04 idential candidates have also referenced 0.1 0.02 intergenerational 0.00 0.0 mobility as being an 1940 ’50 ’60 ’70 ’80 ’90 2000 issue of concern.2 One dimension of this issue Intergenerational elasticity Returns to college that is not well underNotes: Units are percentage points. The intergenerational elasticity for 1950 to stood, however, is 2000 uses estimates from table 1, column 2 of Aaronson and Mazumder (2008). The 1940 estimate is projected based on the results from table 2, column 2. whether intergeneraSources: Aaronson and Mazumder (2008); Goldin and Katz (1999). tional 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. the income of his or her parent.4 Both incomes are brother correlation, returns to education 0.5 measured in logs so that the association can be interpreted 0.4 in percentage terms. An inter0.3 generational elasticity of 0.5, for 0.2 example, implies that if a father’s 0.1 income was 10% above the mean in 0.0 one generation, we Log earnings Log family Log wages Returns to would expect the income education son’s income in 1970−81 1983−95 the next generation Source: Levine and Mazumder (2007). to be 5% above the mean. A smaller intergenerational Economic models and measures of elasticity suggests less persistence in intergenerational mobility inequality and greater mobility, while a larger intergenerational elasticity is Before discussing trends in intergenerassociated with less intergenerational ational economic mobility, it may be mobility. Studies that have used the useful to explain how economists think income of men in the labor market about intergenerational mobility and during the 1990s and 2000s point to an why it might have changed over time. intergenerational elasticity of around Economic models have emphasized the 0.5 or 0.6 in the U.S., while estimates importance of parental investment in are typically in the 0.2 to 0.3 range for children’s human capital as one of the Canada and several Nordic countries. key mechanisms behind the intergenResearchers are only beginning to erational transmission of labor market understand the causes behind these earnings. One such model developed differences, but the findings thus far by Solon3 points to at least two imporsuggest that there may be less economic tant factors that could cause intergenerational mobility to change over time: opportunity in the U.S. than in other industrialized countries. changes in the labor market returns to education and changes in the public proTo estimate the intergenerational elasvision of human capital. In periods where ticity, researchers try to gather individualthe returns to schooling are rising, the level data on the income of both parents payoff to a given level of parental investand children during their prime earning ment in children’s human capital will years and preferably for long stretches be larger, causing differences between of time. Therefore, in some respects the families to persist longer and leading to intergenerational elasticity is inherently a decline in intergenerational mobility. a backwards-looking measure that can In contrast, during periods where pubonly be measured after the mobility lic access to schooling becomes more experience has been completed. So widely available, then one might expect while it is certainly possible to construct the intergenerational association to an estimate of intergenerational mobility decline and mobility to rise. for individuals in today’s labor market, mobility is only well measured for indiThe most commonly used measure of viduals who were born prior to around intergenerational mobility is the “inter1970 and may not reflect the degree generational income elasticity,” which of opportunity available to children captures the association between the born today. income of a child (in adulthood) and 2. Changes in brother correlations over time Previous studies of long-term trends in intergenerational mobility Since economic theory has emphasized the returns to schooling as a key potential driver of trends in intergenerational mobility, it makes sense to measure intergenerational mobility during periods in which the returns to schooling is known to have changed sharply. Using historical census data, Goldin and Katz5 show that the returns to college in the labor market dropped from 1940 to 1950, stayed relatively steady between 1950 and 1980, and then rose after 1980. Although there is no available data set that links the earnings of parents to those of their children for most of the twentieth century, one can use an alternative methodology to study intergenerational mobility during these critical periods. Aaronson and Mazumder6 use historical census data to create “synthetic” families by linking children born in a particular year and state to the average income of parents from that state in a prior census. Using this approach, they document trends in the intergenerational elasticity that closely match patterns in the returns to college data estimated by Goldin and Katz (1999). Figure 1 shows that the two periods where the returns to college changed sharply (1940–50 and 1980–90) coincide with turning points in the intergenerational elasticity. These estimates suggest that rates of intergenerational mobility since 1990 are lower than what they were in the decades following World War II. A second paper I co-authored used a very different approach to try to identify changes in intergenerational mobility that occurred around 1980. Specifically, Levine and Mazumder7 estimate income correlations among brothers around this time. The correlation in income between siblings provides an omnibus measure of the combined effects of all family background characteristics shared by siblings that influence future income. Therefore, in addition to measuring the effects of parent income, it also captures other, harder-to-measure influences, such as parenting skills. The larger the sibling correlation, the more important the role of family background is. Levine and Mazumder use two separate surveys that tracked young men from adolescence to adulthood. The first sample is of men born between 1942 and 1952 whose income was measured between 1970 and 1981. The second sample features men born between 1957 and intergenerational elasticity. First, it is a measure of relative mobility. It describes how relative income differences between families change over a generation and, therefore, provides some insight into the degree of opportunity available in a society. However, it does not say anything The gap in test scores between families at the 90th percentile in the income distribution and those in the 10th percentile is now twice as large as the black–white achievement gap. 1965 whose income was measured between 1983 and 1995. Figure 2 shows that the sibling correlation in wages, earnings, and family income all increased markedly across these periods. For example, the brother correlation in annual earnings rose from 0.26 to 0.45. This occurred at the same time that the returns to education increased sharply from 7% to 13%. Bloome and Western8 use the same survey data and find a significant rise in the intergenerational elasticity over this period. Using data on Swedish men, Björklund, Jäntti, and Lindquist9 also report a modest increase in both the brother correlation in earnings and the returns to education across a similar group of birth cohorts as in Levine and Mazumder (2007). On the other hand, two very carefully done studies of trends in intergenerational mobility in the U.S. using the University of Michigan’s Panel Study of Income Dynamics (PSID) have shown very little change over the past few decades.10 In my view, the PSID is best suited for producing reliable estimates of intergenerational mobility only beginning around the mid- to late 1980s, which is after the notable rise in the returns to schooling that began around 1980. Therefore, it may not be surprising that studies using the PSID do not detect any decline in mobility.11 In any case, the results from Aaronson and Mazumder and the studies using the PSID are in broad agreement that intergenerational mobility has been roughly flat since 1990. Interpreting the intergenerational elasticity There are a few points worth keeping in mind when thinking about the about how the absolute level of income changes. It could be that children born into a typical poor family may obtain a significantly higher standard of living than their parents even if they cannot narrow the percentage earnings gap they face relative to other families. Second, the measure reflects both upward and downward mobility over generations. While the press often describes intergenerational mobility in terms of upward mobility from the bottom of the income distribution, a society with a low intergenerational elasticity is also likely to experience a high degree of downward mobility from the top of the income distribution to the bottom. Third, there is no obvious optimal intergenerational elasticity; most of us would prefer a society where we could confer some degree of advantage to our children. Measures of intergenerational mobility, like measures of inequality, are most useful as descriptive statistics that can help inform policy discussions. Prognosis for today’s children The growing concern about intergenerational mobility today probably has little to do with the changes in mobility that may have occurred in 1940 or 1980. The public is likely much more concerned about how the recent economic downturn may shape mobility patterns going forward. At this point, it is probably too difficult to project intergenerational mobility with great confidence. Nevertheless, since the labor market success of the current generation of children will be shaped in large part by their human capital development, we may be able to infer something about future trends in mobility by examining current trends in the gaps in academic achievement by parental income. Unfortunately, the news is not so sanguine. In a very carefully done analysis, Reardon12 presents striking evidence that the difference in test scores by family income has grown by 30% to 40% for children born in 2001 relative to those born in 1976. In fact, the gap in scores between families at the 90th percentile in the income distribution and those in the 10th percentile is now twice as large as the black–white achievement gap, which has gathered considerable attention. This suggests that at least some of the important policy measures to be considered should seek to address the growing disparities in educational success in order to address the growing concerns related to intergenerational mobility. 1 See Jason DeParle, 2012, “Harder for Americans to rise from lower rungs,” New York Times, January 4, New York ed., p. A1. 2 See Josh Sanburn, 2012, “The loss of upward mobility in the U.S.,” TIME Moneyland, January 5, available at http://moneyland. time.com/2012/01/05/the-loss-of-upwardmobility-in-the-u-s/. 3 See Gary Solon, 2004, “A model of inter- generational mobility variation over time and place,” in Generational Income Mobility in Charles L. Evans, President ; Daniel G. Sullivan, Executive Vice President and Director of Research; Spencer Krane, Senior Vice President and Economic Advisor ; David Marshall, Senior Vice President, financial markets group ; Daniel Aaronson, Vice President, microeconomic policy research; Jonas D. M. Fisher, Vice President, macroeconomic policy research; Richard Heckinger,Vice President, markets team; Anna L. Paulson, Vice President, finance team; William A. Testa, Vice President, regional programs, and Economics Editor ; Helen O’D. Koshy and Han Y. Choi, Editors ; Rita Molloy and Julia Baker, Production Editors; Sheila A. Mangler, Editorial Assistant. Chicago Fed Letter is published by the Economic Research Department of the Federal Reserve Bank of Chicago. The views expressed are the authors’ and do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System. © 2012 Federal Reserve Bank of Chicago Chicago Fed Letter articles may be reproduced in whole or in part, provided the articles are not reproduced or distributed for commercial gain and provided the source is appropriately credited. Prior written permission must be obtained for any other reproduction, distribution, republication, or creation of derivative works of Chicago Fed Letter articles. To request permission, please contact Helen Koshy, senior editor, at 312-322-5830 or email Helen.Koshy@chi.frb.org. Chicago Fed Letter and other Bank publications are available at www.chicagofed.org. ISSN 0895-0164 North America and Europe, Miles Corak (ed.), Cambridge, UK: Cambridge University Press, pp. 38–47. 4 5 6 Other measures include the intergenerational correlation, which is similar to the intergenerational elasticity, and “transition probabilities”—the rate at which families move up or down the income distribution across generations. I do not discuss trends in transition probabilities because they cannot be studied over very long periods due to data limitations. Trends in mobility measured by transition probabilities will generally be reflected in trends in the intergenerational elasticity. See Claudia Goldin and Lawrence F. Katz, 1999, “The returns to skill in the United States across the twentieth century,” National Bureau of Economic Research, working paper, No. 7126, May. See Daniel Aaronson and Bhashkar Mazumder, 2008, “Intergenerational economic mobility in the United States, 1940 to 2000,” Journal of Human Resources, Vol. 43, No. 1, Winter, pp. 139–172. Relative to the standard intergenerational elasticity, the measure based on this approach will place greater weight on the influences of one’s state of birth that are correlated with parent income. Aaronson and Mazumder show that any difference between the two estimators is likely to be too small to account for the trends. 7 See David I. Levine and Bhashkar Mazumder, 2007, “The growing importance of family: Evidence from brothers’ earnings,” Industrial Relations: A Journal of Economy and Society, Vol. 46, No. 1, January, pp. 7–21. 8 See Deirdre Bloome and Bruce Western, 2011, “Cohort change and racial differences in educational and income mobility,” Social Forces, published online December 22, available by subscription at http://sf.oxfordjournals.org/content/ early/2011/12/22/sf.sor002.abstract. 9 See Anders Björklund, Markus Jäntti, and Matthew J. Lindquist, 2009, “Family background and income during the rise of the welfare state: Brother correlations in income for Swedish men born 1932–1968,” Journal of Public Economics, Vol. 93, No. 5–6, June, pp. 671–680. 10 Tom Hertz, 2007, “Trends in the intergenerational elasticity of family income in the United States,” Industrial Relations: A Journal of Economy and Society, Vol. 46, No. 1, January, pp. 22–50; and Chul-In Lee and Gary Solon, 2009, “Trends in intergenerational income mobility,” Review of Economics and Statistics, Vol. 91, No. 4, November, pp. 766–772. 11 The earliest representative cohorts of chil- dren in the PSID were born in the early 1950s, and income during their peak earning years (e.g., 35–45) can only be measured beginning in the mid- to late 1980s. PSID studies have produced estimates for earlier periods by imposing additional assumptions concerning the age pattern in the intergenerational elasticity. 12 Sean F. Reardon, 2011, “The widening academic achievement gap between the rich and the poor: New evidence and possible explanations,” in Whither Opportunity? Rising Inequality, Schools, and Children’s Life Chances, Greg J. Duncan and Richard J. Murnane (eds.), New York: Russell Sage Foundation, chapter 5.
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