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posted on 29 August 2016

Income Persists More Than Wealth Between Generations

from the St Louis Fed

Research has shown evidence of persistence in both income and wealth across generations. But which one persists more? How likely are people to do better than their parents? A recent article inThe Regional Economist explored intergenerational mobility, or the changes in family economic status between successive generations.

Research Officer and Economist George-Levi Gayle and former Technical Research Associate Andrés Hincapié noted: "Being able to do better than one's parents is part of the American Dream. Also, a society with intergenerational mobility might have less economic inequality across generations."

The authors mentioned two ways to approach increasing economic mobility:

  • Economic growth, or raising earnings or wealth for the entire population

  • Economic opportunity structure, such as policies aimed at leveling the playing field

Gayle and Hincapié focused on the effect of the economic opportunity structure, examining which type of policies are more effective for promoting mobility: helping the poor escape poverty or limiting the advantages of the privileged. Those who grew up in more well-to-do homes simply have advantages over those who didn't, as Gayle and Hincapié noted that persistence across generations has been documented for both income and wealth:

  • Earnings persistence is mostly due to investment in early childhood education and other human capital development.1

  • Persistence of residual wealth (or wealth net of education and lifetime earnings from working, or permanent income) is due to bequests, asset accumulation and the capital market.2

Gayle and Hincapié examined age-adjusted correlations of wealth and income across generations for the period 1968-2013. They found that the intergenerational elasticity of earnings was 0.4 and of wealth was 0.38. This means that 10 percent differences in parents' income and wealth led to 4 percent and 3.8 percent differences, respectively, for offspring's income and wealth.

However, for technical reasons, the wealth calculation excluded individuals with no wealth or with net debt, which would be one in five people. To incorporate these households, Gayle and Hincapié also reported the correlation between people's rank in their generation's income or wealth distribution and their parents' rank. This is called a rank-rank correlation.

The authors found that the rank-rank correlation was 0.3 for wealth and 0.4 for labor market earnings. They wrote: "Once the wealth distribution with both positive and negative net worth is accounted for, labor market earnings appear to be 33 percent more persistent than wealth."

Still, as the authors pointed out: "Using one number to summarize the intergenerational persistence of earnings and wealth cannot answer whether such persistence is due to the inability of the poor to escape poverty or the persistence of wealth and income at the top." The next blog post will examine how children move to a different rung of the income and wealth ladders from where their parents were.

This post is the first in a two-part series on intergenerational economic mobility. Today's post discusses persistence of income and wealth from parents to children.

Notes and References

1 Gayle, George-Levi; Golan, Limor; and Soytas, Mehmet A. "What Is the Source of the Intergenerational Correlation in Earnings?" Federal Reserve Bank of St. Louis, Working Paper 2015-019A.

2 Piketty, Thomas. Capital in the Twenty-First Century. Cambridge, Mass., Belknap Press, 2014.

Additional Resources

Disclaimer

Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

Source

https://www.stlouisfed.org/on-the-economy/2016/august/income-persists-more-generations-wealth

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