Intergenerational Economic Mobility - Coursework Example

Intergenerational Economic Mobility Name Course Tutor’s Name Date Introduction Intergenerational economic mobility has been defined as the degree of change in the economic status of children and their parents (Blanden, Gregg & Macmillan 2007, p. C43). Usually, the children’s economic statuses as adults are measured against their parents’ economic statuses to establish the intergenerational economic mobility. If income levels of children (as adults) vary greatly from their parents, the mobility is regarded as high. If not much change is observed between children (as adults) and their parents, mobility is regarded as non-existent or minimal. As would be expected, a link has been established between poor economic outcomes among parents and similar outcomes among their children in their adult years. According to Blanden et al. (2007, p. C43), the strong link could be explained by restricted life chances which poorer parents give their children, which ultimately lead to suboptimal performance in the children’s economic potential. Significance of intergenerational economic mobility The significance of intergenerational economic mobility is perhaps better understood using trends which indicate that academic performance by students from different economic backgrounds is characterised by a wide gap (Mazunder 2012, p. 1). Specifically, children from high-income backgrounds were seen to perform significantly better academically compared to their counterparts from low-income backgrounds. The significance of the differences in education is further compounded by the finding that the quality of education that children get impacts the quality of their human capital, something that eventually determines their income as adults (Mazunder 2012, p. 2). Blanden et al. (2007, p. C43) draw a link between parents’ economic wellbeing or the lack thereof by noting that education is the most common method through which parents pass their economic wellbeing to their children. Ideally, children from richer backgrounds get better education opportunities, which translates to better educational outcomes and this often makes them earn better incomes compared to children who missed out on good education opportunities. Blanden et al. (2007, p. C43) however note that in addition to education, transmission of wealth between parents and their children can also happen through non-cognitive skills and attachment to the labour market early in a child’s life. Intergenerational income mobility also has a significance in policymaking because as Solon (1992, p. 393) observes, there is a belief that the inequalities that arise from the differences in incomes justify government intervention at least for purposes of ensuring that every child gets equal opportunities in life. Maurin (2002, p. 302) notes that in addition to providing children with better education opportunities, parents whose income is high afford better medical care as well as housing and food for their children, and combined, these factors enhance a child’s possibility of healthy development, something that affects their performance in school. Solon (1992, p. 393) notes that the belief that inequality stems from intergenerational income mobility is based on a line of thought that has perpetuated the idea that one generation of people transmits wealth to another generation. Specifically, such people have always thought that children born to the wealthy will most likely be equally or more wealthy in their adulthood than their parents. Arguably, one gets the impression that inequality in childhood is perceived as having more effect on a child’s future income prospects, and if this is the case, it is an indicator that children born in poor economic backgrounds have a disadvantage that makes it harder for them to overcome poverty later in life. Moreover, intergenerational mobility is considered as a critical summary of a society’s ability to give its members equal chances regardless of their economic backgrounds. Ideally, a society with low intergenerational mobility is not desirable since it implies that the government has failed to develop and implement mobility-enhancing policies. How economists typically measure intergenerational mobility As would be expected, economists have in the past used economic models to measure intergenerational economic mobility. Mazunder (2012, p. 2) notes that such economic models often emphasise the effect that parental investment has on the children’s human capital. True to Mazunder’s (2012, p. 2) observations, Solon (1992, p. 403) has developed a model that identifies two factors that could affect intergenerational mobility. He identifies them as human capital changes that may occur in the public, or the returns that education has on the labour market. Solon’s model implies that if educational returns are high, children of parents who could afford to invest more in their education get a better payoff. In such a case, the difference between adult incomes of children from high-income households and lower-income households is more evident. Solon’s model further creates the impression that if schooling was available to all children regardless of their income backgrounds, the intergenerational association of income would be lower, and as such mobility would be higher. On his part, Mazunder (2012, p. 2) notes that the “intergenerational income elasticity” is a common measure used by economists to determine the intergenerational economic mobility. The foregoing measuring approach captures a child’s (in their adulthood) income and the parent’s income. Both sets of incomes are then measured in logs, which enables the person doing the measuring to interpret the incomes in percentages. Generally, the model utilises a log-log utility. This approach is useful when measuring non-linear parameters in a relationship, since the log transformations can transform non-linear parameters into linear ones. Using the log-log model for example, economists have established a 0.4 intergenerational score in the US. On average therefore, a US citizen passes on 40 percent of his wealth (or economic advantage) to his children. Therefore, if person X earns $10,000 more than another person Y, the 0.4 score means that on average, the children of person X will earn $4,000 more than the children of person Y. Economists have however had concerns that most models used to measure intergenerational economic mobility do not succeed in doing so. Corak and Heisz (1999, p. 506) for example note that there have been concerns that the measuring tools of intergenerational mobility have been inaccurate in the past. In addition to measurement errors, Corak and Heisz (1999, p. 507) also note that there have been persisting sample selection problems. Similar sentiments are shared by Solon (1992, p. 395), who notes that in the past, it has proved to be difficult for researchers to get the real permanent income of respondents included in their studies. Consequently, researchers have had to contend with using annual incomes. Lee and Solon (2009, p.766) also note that some researchers rely on some narrow information that is available about their respondents. The results obtained from such researches are not entirely representative of the real situation in different countries where the research is conducted. The specific measurement of intergenerational economic mobility involves a regression-to-mean model, usually represented by the equation: “lnYi,t = α+ βlnYi,t-1 + εi;” (Corak 2013, p. 3). In the above equation, Y represents permanent earning by members of a particular family; t signifies the father’s earnings, while t-1 marks the son’s earnings in adulthood. In most literature, Y is used in reference to the earnings of both fathers and sons, because as Corak (2013, p. 3) notes, its usage makes analysis easier especially since researchers do not have to factor in women’s role in the workforce. In the equation ε represents other influences independent from a parent’s income, which may affect a child’s income in adulthood, alpha (α) represents the average incomes between the father and son and considers such factors as changes in technology, trade, productivity and the labour market. The coefficient beta (β) on the other hand is used by economists to indicate the percentage difference between a child’s and the parent’s earnings. The lower β is, the more intergenerational mobility there is between a parent and their child. A higher β on the other hand indicates less intergenerational mobility (Corak 2013, p. 4). Challenges for empirical research From the equation above, it is rather obvious that researchers need to measure the permanent earnings for both parents and their children who are being involved in a research project. Notably, measuring permanent earnings is the first challenge that empirical researchers face. As far back as 1971, Ramanathan (1971, p. 177) noted that how economists measured permanent incomes was flawed. The author noted that economists use the income history obtained from a specific household for up to five years to estimate the permanent income. Ramanathan (1971, p. 177) however notes that most households do not have earning histories spanning more than a year. Consequently, researchers would use the available data, hence disregarding the need to use data that had been gathered over several years. As a result, Ramanathan (1971, p. 177) observes that the data obtained by researchers is often non-representative and inaccurate. To compensate for the absence of data that spans several years, it is noted that researchers estimate permanent incomes by classifying similar households into groups. However, Ramanathan (1971, p. 178) criticises the approach as faulty too because the approach does not take into account receipts that the grouped households could get in future. Additionally, households grouped together may have differences that affect their individual permanent incomes, hence meaning that the results obtained from such a sample of grouped households are inaccurate. Gathering data that would reflect fathers’ earnings and their sons’ earnings is also relatively hard for researchers considering the time differences. It is worth noting that by the time children get to adulthood, their parents may not have a good recollection of what their incomes were when they were raising the children. Maurin (2002, p. 304) notes that obtaining direct data that correctly shows what parents earned when their children were in school is a major hurdle that empirical researchers face. Arguably therefore, most of the data that has been used in previous studies suffers inaccuracies, or in some cases, does not span as many years (ideally two to five years) that would be reflective of permanent incomes in specific households. Another challenge in measuring parents’ incomes is related to measuring factors that have no correlation with incomes, but which affect the parents’ or their children’s ability to work and earn decent incomes (Maurin 2002, p. 303). In some cases, children from poor families perform well in school despite the different challenges they face as a result of their parents’ limited resources. On the reverse side, a child from a wealthy family may not be a very good learner in school. Notably, it is not clear whether researchers factor in the possibility that children from high-income households may not be as wealthy as their parents were. Notably, Maurin (2002, p. 304) observes that empirical research studies do not always isolate factors such as a child’s educational capacity. Biases also arise in empirical studies intent on measuring intergenerational income mobility. Maurin (2002, p. 304) notes that such biases mainly arise from measurement errors. A predominant error in studies that measure the intergenerational economic mobility is single-year measurements, which researchers assume are an approximation of parents’ permanent incomes. In reality, permanent incomes as indicated by Ramanathan (1997, p. 177) require researchers to consider a person’s income for a period ranging between two to five years. Policies required to increase intergenerational economic mobility Some economists believe that policies can rectify some anomalies that exist in the economy. One area that such economists believe that policy intervention can work is in providing equal opportunities to all children regardless of their economic background. For instance, Corak and Heisz (1999, p. 527) have indicated that policy interventions such as progressive income taxes, subsidies in education and graduated estate taxes can improve the intergenerational economic mobility outcomes for children from poor backgrounds. The progressive income tax works by imposing higher taxes on higher incomes while sparing the lower income groups of too much tax burden. For example, a specific high-income group may have to pay 45 percent of their earnings in taxes, while a specific low-income group may only be required to pay 10 percent of their incomes (Usher 1996, p. 5). Proponents of progressive income taxes justify it by arguing that rich people need to share their wealth with the government, and the government is at liberty to use the same income to better the social infrastructure for the lower-income groups. Additionally, it is argued that the comparatively lower taxes on the poor leaves them with more disposable incomes, which they can use, for example, to send their children to school. Usher (1996, p. 62), however notes that allocation of the benefits accrued from progressive tax incomes is not always easy. Specifically, the author notes that there is no guarantee that the money attained from imposing higher taxes on rich people will be used to improve the social infrastructure in a manner that benefits poor people. Subsidies in education on the other hand could be a policy measure meant to ensure that all children, regardless of their economic backgrounds, access quality education. According to Bolton (2000, p. 789), subsidies in education are not an entirely new idea. They have been used in the past, and they explain why some countries have free education for basic education as well as bursaries and scholarships in higher education. Interestingly, high-income earners are not always comfortable schooling their children in government-funded schools in some countries. Consequently, private schools have increased specifically for purposes of accommodating children whose parents are not comfortable schooling them in public schools. The quality of education in public funded schools is debatable and is within the context of this paper; however, it is worth noting that much as a basic education is necessary, it is higher education that has been seen to have a major effect on children’s earning potential later in life (Bolton 2000, p. 799). However, much as higher education subsidies are a good thing for students from low-income households, they have been criticised for a host of reasons. Edwards and McLuskey (2009) for example argue that subsidies in higher education have driven the costs of higher education up, because with an increased demand comes an increase in the price of educational services. The two authors also argue that the tax used by governments to subsidise higher education is often attained from workers who do not have a college degree, and can therefore be seen as getting money from people who need it most to help others who will use their educational advantage to earn high salaries. From an intergenerational income mobility perspective, Edwards and McLuckey’s (2009) arguments do not make much sense because even if taxes obtained from the poor would be used to educate children from poor backgrounds, mobility of the latter across income groups would be enhanced. Graduated estate tax is also another policy approach that governments can use to increase intergenerational economic mobility (Corak & Heisz 1999, p. 527). The aforementioned tax is progressive too, and ideally, the more properties or larger property people own, the more taxes they pay for the same. According to Corak and Heisz (1999, p. 527), the graduated estate tax is a form of redistributive tax where the wealthier people in the society pay more. The taxes can then be used by respective governments to enhance the wellbeing of people in lower-income groups. Specifically, governments can invest in basic infrastructure that would be targeted at enhancing the economic outcomes of future generations among lower-income groups. By doing so, governments would be enhancing intergenerational economic mobility. Blanden et al. (2007, p. C58) suggest that policymakers can also strengthen the relationship that exists between families and educational attainments. Specifically, the authors suggest that policymakers should develop and launch programmes that benefit all children equally. The suggested programmes would either direct resources to children in poor communities or use universal interventions that would be applicable to children from affluent and poor backgrounds. Since most children from affluent families would afford the programmes contained in the universal intervention, such programmes would be used with the intention of helping children from poor backgrounds access equal opportunities in school, and in life later on. Blanden et al.’s sentiments are echoed by Mazumder (2012, p. 3), who argues that policy measures should address differences in educational success between children from affluent backgrounds and their counterparts from poor backgrounds. Blanden et al. (2007, p. C59) further note that if policies seeking to enhance intergenerational mobility through education were to be effective, policymakers would need to design them in a manner that not only addresses the cognitive abilities of targeted children but also their concentration, their self-esteem and personal efficiency. Interpreted, the suggestion made by Blanden et al. (2007, p. C59) means that the future earning of children from poor backgrounds is not only influenced by their cognitive abilities, but by other factors inherent in people, which include one’s sense of worth, their self-esteem, their ability to concentrate on specific things without being distracted, and their ability to work on something effectively. Other inherent factors include genes and culture as identified by Ichino, Karabarbounis and Moretti (2011, p. 61). Notably, redistributive policies may not be successful in neutralising the effects of the aforementioned factors, but Ichino et al. (2011, p.61) note that they can succeed in enhancing the talents of children from poor economic backgrounds. Conclusion This paper has discussed the significance of intergenerational income mobility and noted that the inequalities in the society could to a great extent be explained for by the inelasticity of incomes across generations. The paper has also highlighted the manner in which economists measure intergenerational income mobility, and specifically notes that relying on specific variables such as parents’ income within specific years poses major challenges for empirical research because often, researchers are unable to access such information. Finally, the paper has discussed the public policies that are required to increase intergenerational income mobility and noted that redistributive policies could be ideal. Specifically, the paper identifies educational policies that would help children from poor economic backgrounds access the same opportunities as their counterparts from high-income backgrounds. The article also identifies tax measures such as progressive income taxes and graduated estate tax as ideal for redistributing wealth by investing in infrastructure that would benefit the poor. References Blanden, J, Gregg, P & Macmillan L 2007, ‘Accounting for intergenerational income persistence: non-cognitive skills, ability and education’, Economic Journal, vol. 117, no. 519, pp. C43‐C60. Bolton, C 2000, ‘Mississippi’s school equalization program, 1954-1954: a last gasp to try to maintain a segregated educational system’, The Journal of Southern History, vol. 66, no. 4, pp. 781-814. Corak, M & Heisz A1999, ‘The intergenerational earnings and income mobility of Canadian men: Evidence from longitudinal income tax data’, Journal of Human Resources, vol. 34, no. 3, pp. 504‐533. Corak, M 2013, ‘Income inequality, equality of opportunity, and intergenerational mobility’, IZA Discussion Paper Series, no. 7520, pp. 1-28. Edwards, C & McClunskey, N 2009, ‘Higher education subsidies’, CATO Institute, viewed 8 May 2015, . Ichino, A, Karabarbounis, L & Moretti, E 2011, ‘The political economy of intergenerational income mobility’, Economic Inquiry, vol. 49, no. 1, pp. 47-69. Lee, C & Solon, G 2009, ‘Trends in intergenerational income mobility’, Review of Economics and Statistics, vol. 91, no. 4, pp. 766‐772. Maurin, E 2002, ‘The impact of parental income on early schooling transitions: a re-examination using data over three generations’, Journal of Public Economics, vol. 85, pp. 301-332. Mazumder, B 2012, ‘Is intergenerational economic mobility lower now than in the past?’ Chicago Fed Letter, no. 297, pp. 1-4. Ramanathan, J 1971, ‘Measuring the permanent income of a household: an experiment in methodology’, Journal of Political Economy, vol. 79, no. 1, pp. 177-185. Solon, G1992, ‘Intergenerational income mobility in the United States’, American Economic Review, vol. 82, no. 3, pp. 393‐408. Usher, D 1995, The uneasy case of equalization of payments, The Fraser Institute, Vancouver, British Columbia. Read More