from the St Louis Fed
— this post authored by Ray Boshara
No doubt you’ve heard the quote, often attributed to former University of Oklahoma and NFL coach Barry Switzer, about people who were “born on third base and go through life thinking they hit a triple.”
Well, new data show that many financially successful Americans do, in fact, have a head start that may be hard for them to recognize – especially since that head start is associated with things completely out of their control.
Inherited Versus Acquired Traits
For these lucky Americans, much of their financial advantage is gained at birth: “inherited” rather than “acquired.” For purposes of this research:
- Inherited characteristics include someone’s year of birth, race or ethnicity, and whether their parents went to college.
- Acquired characteristics mean the income and wealth associated with someone’s own college education.
In a recently released Demographics of Wealth report, the first in a series of three, my Center for Household Financial Stability colleagues William Emmons, Lowell Ricketts and Ana Kent state that “Inherited demographic characteristics are key aspects of one’s identity over which one exerts no control. The view we take is that any adult outcomes that are systematically related to these inherited characteristics likewise are inherited or granted, rather than earned in any meaningful sense.”
In this first report, focused on the relationship between education and wealth, my colleagues find three overall distinct effects: the head-start, upward-mobility and downward-mobility effects.
Head-Start Effect
The head-start effect looks at how just these inherited characteristics predicted income and wealth. The results are striking.
For example, the typical middle-aged families with the most “favorable” inherited traits – white and college-educated parents – had three times as much income and six times as much wealth compared with the median family in the entire population.
Think of the head-start effect not as replacing hard work and effort (which always matter), but instead as a tailwind: an advantage that amplifies your own efforts.
Upward-Mobility Effect
Now, we’ll add in the effect of going to college.
Somewhat more optimistically, my colleagues found a significant upward-mobility effect among middle-aged, first-generation college grads. That’s when someone with “less favorable” inherited characteristics – parents who did not finish college – received a far larger boost in wealth (up 20 rungs of the ladder) and income (up 23 rungs of the ladder) from going to college than someone whose parents earned a degree (up 11 rungs of both the wealth and income ladders).1
Not everyone has the interest in, aptitude or need for a four-year college degree. But for those who do, this research suggests that there is a definite financial advantage for getting first-generation kids to and through college.
Downward-Mobility Effect
Again factoring in the effect of college, Emmons, Ricketts and Kent found what they call the downward-mobility effect. That’s when someone does not finish college, even though his or her parents did, and ends up paying a pretty steep price for it.
Compared with outcomes we would expect just based on their inherited traits, these non-grads dropped 16 ranks down the income scale and 18 ranks down the wealth scale by not getting a college degree – compared with dropping less than 10 ranks in income and wealth if neither the respondent nor his or her parents had college degrees.
Conclusion
What does this research mean? Stated simply, both your starting point in life and education matter. The head-start effect, which one gets at birth, provides significant financial advantage. But this advantage can be partially lost by not finishing college.
However, even those without that head start have the opportunity for considerable upward mobility by finishing college.
Notes and References
1 By “ladder,” we mean one’s income or wealth ranking expressed in terms of a percentile. The lowest ranking is 0, while the highest ranking is 100.
Additional Resources
- The Demographics of Wealth: The Financial Returns from College across Generations: Large but Unequal
- Dialogue with the Fed: A Lost Generation? Young Families after the Great Recession
- On the Economy: Wealth Building Efforts beyond College and Owning a Home
- On the Economy: The Disparate Wealth Paths for College Grads of Different Races/Ethnicities
Source
https://www.stlouisfed.org/on-the-economy/2018/april/born-third-base-effect-head-starts-college-family-wealth
Disclaimer
Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.
