Wealth generations

1st March, 2008

My father and my mother met at a venerable English university. I went to the same place, as did two of my sisters. Now that my stepbrother has followed in our footsteps, I am starting to think that there may be more than coincidence behind the whole business.

If we accept that fluke is an unlikely explanation for the uniformity of the Harford educational experience, it is an example of what economists call “intergenerational transmission of educational attainment”. Intergenerational transmission of income is a closely related issue: do the children of rich parents grow up to be rich, and do the children of poor parents grow up to be poor?

The simple answer is that it depends in which country they live. In the US and the UK, if your parents were twice as rich as the average for their generation, you could expect to be 40 per cent richer than the average for your generation and so your children could expect to be about 16 per cent richer than the average for theirs.

Sensible readers will be wondering whether that suggests a lot of intergenerational income mobility or not. I do not know the answer: it’s very hard to say what we should expect, or want. What we do know – thanks to the efforts of Gary Solon, a professor at the University of Michigan and a leading light in the field – is that the transmission of income down the generations is higher than we used to think. Estimates from the 1970s and 1980s, which suggested much lower income persistence, were dogged by poor data.

We also know that rich parents are much more likely to have rich children in the US, UK and France than Canada, Sweden or Denmark. In Denmark, if you are twice as rich as the average, your children will tend to be just 15 per cent richer than the average. (These genericsing.com international comparisons come from a survey by Miles Corak of Ottawa University.)

Solon thinks these findings are “just the beginning of a discussion, not the end”. He has a good point. Should policy try to respond to the fact that I went to the same university as my parents? That rather depends on whether I got in because my father called in a favour from the tutor for admissions. What if I simply benefited from a family love of books, or even inherited some bookish genes? It is hard to imagine any but the most totalitarian state doing much about that.

While we think of intergenerational income mobility as a sign of meritocracy, if we did live in a genuine meritocracy, it is hard to know how much mobility we should expect to see. People have a certain kind of “merit” in mind when they speak glowingly of a meritocracy, and that kind of merit tends to run in the family.

That is true for both genetic and cultural reasons. A fascinating new study, co-authored by Solon, looks at a remarkable set of data on adopted Swedish children. The researchers have data on all four “parents” – two biological and two adoptive – and use it to look at the correlation between the parents’ level of education and the child’s. It turns out that all four parents influence the child’s educational level. (If anything, sharing genes has a stronger influence than sharing a home; there is not much in it.)

If, as Solon suggests, this is just the beginning of a discussion, where should the conversation go now? Many economists believe that we should be looking for effective interventions to improve the health, nutrition and education of pre-school children in an attempt to level the playing field. It is not yet clear whether we shall find them.

Also published at ft.com.

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