What Is Intergenerational Elasticity of Income?
Intergenerational elasticity of income (IGE) is a key concept within the broader field of economic mobility, measuring the extent to which an individual's economic standing is influenced by their parents' income. It quantifies the statistical relationship between the income of one generation and the income of the next. A higher intergenerational elasticity of income indicates a stronger link between parental and child income, suggesting lower intergenerational mobility or a greater persistence of economic status across generations67, 68. Conversely, a lower IGE implies that a child's adult income is less dependent on their parents' financial position, signifying higher mobility and potentially greater equality of opportunity65, 66.
History and Origin
The study of intergenerational socioeconomic status can be traced back to the 1920s, with modern work on occupational mobility emerging in the 1950s and socioeconomic status in the 1960s64. However, economic research focusing specifically on intergenerational income mobility and its measurement via elasticity gained significant traction in the last three decades63. Early estimates for the United States in the mid-1980s suggested a relatively low intergenerational income elasticity, often around 0.2, implying a highly mobile society where family background had limited impact on a child's future income61, 62.
However, these initial findings were significantly re-evaluated as researchers gained access to better data and refined their methodologies. A seminal study by Gary Solon in 1992, along with work by Zimmerman (1992), demonstrated that previous estimates were likely downward-biased due to measurement errors and reliance on single-year income snapshots instead of long-term income58, 59, 60. Subsequent methodological improvements, accounting for transitory income fluctuations and lifecycle bias, led to higher estimates of the intergenerational elasticity of income, often around 0.4 to 0.5 for the U.S., indicating greater intergenerational dependence than previously thought56, 57. Research by the National Bureau of Economic Research (NBER) further highlights how the intergenerational elasticity of income is considered a primary measure of societal equal opportunity, influenced by the interplay of private and public decisions55.
Key Takeaways
- Intergenerational elasticity of income (IGE) quantifies the relationship between parents' income and their children's adult income.
- A higher IGE suggests lower intergenerational mobility and greater persistence of economic status across generations.
- Early research underestimated IGE due to data limitations and methodological issues.
- IGE is often estimated using a regression model, where the slope coefficient represents the elasticity.
- Factors such as education, cognitive skills, and parental investments contribute to the observed intergenerational elasticity.
Formula and Calculation
The intergenerational elasticity of income is typically estimated using a simple linear regression model that relates the logarithm of a child's adult income to the logarithm of their parents' income. The formula is expressed as:
Where:
- (\ln(Y_c)) is the natural logarithm of the child's adult income.
- (\ln(Y_p)) is the natural logarithm of the parents' income.
- (\alpha) is the intercept.
- (\beta) is the intergenerational elasticity of income (the slope coefficient), which represents the percentage change in a child's expected income for a one percent change in parental income53, 54.
- (\epsilon) is the error term, accounting for other factors influencing the child's income52.
Researchers strive to use measures of lifetime income for both generations to minimize biases, though short-term income snapshots are often used due to data availability51.
Interpreting the Intergenerational Elasticity of Income
Interpreting the intergenerational elasticity of income involves understanding what the beta coefficient signifies. If the intergenerational elasticity of income is, for example, 0.4, it implies that if parents' income is 50% above the average for their generation, their child's expected income would be 20% (0.4 multiplied by 50%) higher than the average for their own generation50.
A value of 0 indicates complete income mobility, meaning there is no statistical relationship between parental and child income, and a child's adult income is entirely unrelated to their parents' economic status48, 49. Conversely, a value of 1 signifies complete immobility, where a child's income perfectly mirrors their parents' income, implying a rigid transmission of economic standing across generations46, 47. Most societies exhibit an IGE between 0 and 1, with values closer to 0 indicating higher mobility and values closer to 1 indicating lower mobility45. Understanding this measure helps in assessing the degree of equality of opportunity within a society43, 44.
Hypothetical Example
Consider a hypothetical society where the intergenerational elasticity of income has been estimated at 0.5.
Scenario 1: High-Income Parents
Suppose a set of parents earns $150,000 annually, while the average income for their generation is $100,000. Their income is 50% above the average.
Using the IGE of 0.5, their child's expected income would be 0.5 * 50% = 25% above the average income for their own generation. If the average income for the child's generation is also $100,000, then the child's expected income would be $125,000. This demonstrates how a portion of the parents' economic advantage is statistically transmitted to the next generation.
Scenario 2: Low-Income Parents
Now consider a set of parents earning $50,000 annually, which is 50% below the average of $100,000 for their generation.
With the same IGE of 0.5, their child's expected income would be 0.5 * (-50%) = -25% below the average for their generation. If the child's generation average is $100,000, the child's expected income would be $75,000. This illustrates the persistence of economic disadvantage across generations.
This example highlights that even with an IGE of 0.5, implying some mobility, there is still a significant tendency for economic status to be passed down. Factors such as access to human capital investments and educational opportunities often play a role in this transmission41, 42.
Practical Applications
Intergenerational elasticity of income is a crucial metric for policymakers and economists when analyzing income inequality and social mobility. It informs discussions on policies aimed at fostering greater equality of opportunity and reducing the persistence of economic disparities across generations39, 40.
For instance, understanding the intergenerational elasticity of income helps in evaluating the effectiveness of investments in education, early childhood development programs, and other social welfare initiatives designed to improve outcomes for children from disadvantaged backgrounds37, 38. A lower intergenerational elasticity of income is often associated with more equitable societies, leading to policy considerations such as progressive taxation and robust social safety nets. Researchers at institutions like the Center for Economic Policy Research (CEPR) actively study IGE to understand the nuances of intergenerational mobility in various countries and for different income groups, informing targeted policy interventions36. For example, research has examined how policies that equalize individual opportunity can promote both equity and economic growth by curbing parental income transmission35.
Limitations and Criticisms
Despite its widespread use, the intergenerational elasticity of income has several limitations and criticisms. One significant issue is the potential for measurement error and "lifecycle bias," where using short-term income data rather than lifetime or permanent income can lead to an underestimation of the true intergenerational elasticity of income32, 33, 34. This bias arises because current income may not accurately reflect long-term economic standing, especially for younger or older individuals31.
Another criticism is that the intergenerational elasticity of income can be mechanically affected by changes in income inequality between generations30. If inequality increases, the IGE may appear higher even if the underlying relationship between parental and child income has not fundamentally changed29. This makes direct comparisons across countries or over time challenging without accounting for changes in the income distribution28.
Some scholars also argue that IGE, when based on logarithmic transformations, may not always provide meaningful insights unless paired with the model's convergence value, which is embedded in the intercept27. A low IGE, often interpreted as high mobility, might not imply that all subgroups converge to the same wealth level26. Alternative measures, such as rank-rank coefficients, which assess the link between a previous generation's income rank and a current generation's rank, have been proposed to address some of these limitations and provide a "purer" measure of persistence23, 24, 25. These rank-based measures are less sensitive to changes in the overall income distribution22.
Intergenerational Elasticity of Income vs. Intergenerational Mobility
While closely related, intergenerational elasticity of income (IGE) is a specific quantitative measure of intergenerational mobility, rather than being synonymous with it. Intergenerational mobility is a broader concept referring to the extent to which individuals move up or down the economic or social ladder relative to their parents. It encompasses various dimensions, including income, wealth, occupation, and education.
The intergenerational elasticity of income, specifically, measures the persistence of income across generations. A high IGE indicates low intergenerational mobility in terms of income, implying that a child's income is highly correlated with their parents' income. Conversely, a low IGE signifies high intergenerational income mobility, suggesting less dependence on parental income20, 21. Therefore, while intergenerational mobility describes the phenomenon of movement between generations, the intergenerational elasticity of income provides a precise numerical value to quantify the degree of that income persistence or mobility. Other measures of intergenerational mobility exist, such as intergenerational wealth mobility or rank-based measures, but IGE remains a primary tool for assessing income transmission18, 19.
FAQs
What does a high intergenerational elasticity of income mean?
A high intergenerational elasticity of income means that there is a strong statistical relationship between parents' income and their children's adult income. This suggests lower social mobility and a greater tendency for economic status to be passed down from one generation to the next16, 17.
Is intergenerational elasticity of income a good measure of equality of opportunity?
It is widely considered one of the best summary measures of the degree to which a society offers equal opportunity irrespective of family background15. However, it has limitations, as it can be influenced by changes in overall economic inequality and requires accurate long-term income data for precise estimation13, 14.
How does education affect intergenerational elasticity of income?
Education plays a significant role in intergenerational elasticity of income. Children of wealthier parents often have access to better educational opportunities and higher levels of human capital development, which can contribute to higher earnings later in life11, 12. This can reinforce the intergenerational transmission of income.
What is the typical range for intergenerational elasticity of income?
The intergenerational elasticity of income typically ranges from 0 to 1. A value of 0 indicates complete income mobility, while a value of 1 indicates complete immobility. Estimates vary by country and methodology, but commonly fall within the 0.2 to 0.6 range for developed nations, with Nordic countries generally exhibiting lower IGEs (higher mobility) and countries like the U.S. and UK showing higher IGEs (lower mobility)9, 10.
What is the difference between intergenerational elasticity of income and income inequality?
Intergenerational elasticity of income measures the persistence of income across generations, showing how much a child's income depends on their parents' income8. Income inequality, on the other hand, measures the dispersion of income within a single generation at a specific point in time7. While related, a society can have high income inequality but also high intergenerational mobility if individuals from different backgrounds have equal chances to succeed.
What are "lifecycle bias" and "attenuation bias" in IGE estimation?
Lifecycle bias occurs when income is measured at ages where current income is not a good proxy for lifetime income, leading to an underestimation of the true IGE5, 6. Attenuation bias arises from measurement errors or transitory fluctuations in parental income, which also tend to systematically lower the estimated IGE3, 4. Researchers use various methods to mitigate these biases, such as averaging income over longer periods or using instrumental variables1, 2.