Intergenerational wealth mobility: Meaning, Criticisms & Real-World Uses

What Is Intergenerational Wealth Mobility?

Intergenerational wealth mobility refers to the extent to which an individual's financial standing and wealth distribution are influenced by that of their parents or previous generations. It is a key concept in socioeconomics that examines how economic status persists or changes across generations within families. High intergenerational wealth mobility suggests that an individual's financial success is largely independent of their parents' wealth, indicating greater economic opportunity and a more level playing field. Conversely, low intergenerational wealth mobility implies that financial advantages or disadvantages are significantly passed down, contributing to persistent income inequality and potentially creating a poverty trap for some.

History and Origin

The study of intergenerational mobility has roots in sociology and economics, with early researchers examining how social status and occupation transmitted across generations. Over time, the focus expanded to include economic dimensions like income and, more recently, wealth. The formal analysis of intergenerational wealth mobility has gained prominence as researchers and policymakers seek to understand the drivers of long-term economic inequality. Data collection efforts, such as the triennial Survey of Consumer Finances (SCF) conducted by the Federal Reserve Board in cooperation with the U.S. Treasury Department, provide crucial insights into household balance sheets, income, and demographic characteristics, enabling deeper analysis of wealth transmission across generations.¹⁷,,¹⁶ This comprehensive survey has been a vital resource since 1992, allowing for detailed examination of financial well-being and its evolution.¹⁵

Key Takeaways

Intergenerational wealth mobility measures the degree to which an individual's wealth is independent of their parents' wealth.
It is a significant indicator of economic opportunity and equality within a society.
Factors such as human capital, social capital, educational attainment, and policy interventions can influence intergenerational wealth mobility.
Low mobility can perpetuate economic disparities, leading to "sticky floors" and "sticky ceilings" in the wealth hierarchy.
Research often uses measures like intergenerational wealth elasticity to quantify the degree of wealth transmission.

Formula and Calculation

Intergenerational wealth mobility is typically quantified using statistical measures, most commonly the intergenerational elasticity of wealth (IPEW) or the intergenerational correlation of wealth. These measures assess the statistical relationship between parents' wealth and their children's wealth.

The intergenerational elasticity of wealth (IPEW) can be approximated by the slope coefficient ((\beta)) from a regression of the natural logarithm of child's wealth on the natural logarithm of parent's wealth:

\ln(W_c) = \alpha + \beta \ln(W_p) + \epsilon

Where:

(W_c) = Child's wealth in adulthood
(W_p) = Parent's wealth when the child was growing up (often averaged over several years)
(\alpha) = Intercept term
(\beta) = Intergenerational elasticity of wealth
(\epsilon) = Error term

A (\beta) value closer to 0 indicates higher intergenerational wealth mobility, meaning a child's wealth is less dependent on their parents' wealth. A (\beta) value closer to 1 suggests lower mobility, implying a strong persistence of wealth across generations. This calculation often relies on longitudinal data that tracks families over decades, providing insight into the long-term patterns of asset accumulation.

Interpreting Intergenerational Wealth Mobility

Interpreting intergenerational wealth mobility involves understanding the implications of its various measurements. A high elasticity, for example, indicates that a significant portion of a parent's financial success or struggle is passed on to their children. This can suggest limited upward mobility for those starting from disadvantaged backgrounds and limited downward mobility for those from affluent families, impacting the ideal of a meritocracy.

Conversely, lower elasticity points to a society where an individual's wealth is less determined by their family of origin, reflecting broader access to resources and opportunities such as quality education financing and entrepreneurial avenues. Analysts use these measures to assess the fairness and dynamism of an economy. For instance, an increase in elasticity over time could signal growing rigidities in the economic structure, where the "birth lottery" plays an increasingly larger role in an individual's financial trajectory.

Hypothetical Example

Consider two families, Family A and Family B, living in a country over two generations.

Generation 1:

Family A (Parents): Accumulates $100,000 in net wealth by the time their child reaches adulthood.
Family B (Parents): Accumulates $1,000,000 in net wealth by the time their child reaches adulthood.

Generation 2:

Child of Family A: Through diligent savings, smart investment decisions, and access to good educational opportunities, the child of Family A manages to accumulate $500,000 in net wealth by adulthood.
Child of Family B: The child of Family B, inheriting some family assets and benefiting from established networks, accumulates $1,500,000 in net wealth by adulthood.

In this simplified example, while the child of Family B still has significantly more wealth than the child of Family A, the relative improvement for the child of Family A ($100,000 to $500,000, a 5x increase) is proportionally greater than that for the child of Family B ($1,000,000 to $1,500,000, a 1.5x increase). This scenario, if representative of a larger trend, would suggest some degree of intergenerational wealth mobility, as the wealth gap between the two families has narrowed somewhat in the second generation relative to their parents' starting points. It highlights how factors beyond initial parental wealth, such as individual savings rate and opportunities, can contribute to mobility.

Practical Applications

Understanding intergenerational wealth mobility is critical for policymakers and economists. The Federal Reserve's Survey of Consumer Finances (SCF) provides detailed data used by the Federal Reserve to set monetary policy, and by lawmakers in Congress to draft tax and retirement legislation.¹⁴ Local governments also utilize this information to guide housing programs and savings initiatives.¹³

Beyond policy, businesses and financial institutions can use insights into intergenerational wealth mobility for strategic financial planning and product development. For instance, if mobility is low, it might suggest a more stratified market where wealth management services are concentrated among a few. Conversely, higher mobility might indicate a broader client base with emerging wealth, requiring different financial products and services. Studies on intergenerational mobility also inform discussions around estate planning and the impact of inheritance on future generations' economic standing. Research published by the National Bureau of Economic Research (NBER) provides evidence on trends in intergenerational mobility in the United States, utilizing administrative earnings records to show how opportunities for upward movement have evolved.¹²

Limitations and Criticisms

Despite its utility, intergenerational wealth mobility as a concept and its measurement face several limitations and criticisms. One challenge is the difficulty in obtaining comprehensive and long-term data on family wealth across multiple generations. Wealth data is notoriously hard to collect accurately, as it includes diverse assets and liabilities, and individuals may be reluctant to disclose full financial details. The Federal Reserve's Survey of Consumer Finances addresses this by using imputation replicates to handle missing data and employing a dual-frame sample to capture a more complete picture, including high-income families.¹¹,¹⁰

Another critique revolves around the choice of metrics. While elasticity provides a quantitative measure, it may not fully capture the nuances of lived experiences or the multidimensional aspects of well-being beyond pure wealth. Additionally, studies often focus on income mobility rather than wealth mobility due to data availability, yet wealth accumulation patterns can differ significantly from income trajectories. For example, a 2018 report by the Organisation for Economic Co-operation and Development (OECD), "A Broken Social Elevator? How to Promote Social Mobility," highlights that upward mobility for those with low-earning parents is so limited that it could take several generations for children to reach the average income level in some OECD countries.⁹,⁸,⁷ The report also points out "sticky floors" and "sticky ceilings," suggesting a lack of mobility at both the bottom and top of the social ladder.⁶,⁵ Some research also indicates that while positional mobility (rank within the wealth distribution) might appear stable, the consequences of the "birth lottery" are amplified when inequality increases, meaning the same rank can correspond to vastly different absolute wealth levels.⁴ This suggests that even if relative positions are maintained, the widening gaps in fiscal policy outcomes can still create significant disparities.

Intergenerational Wealth Mobility vs. Intragenerational Wealth Mobility

While both terms relate to economic movement, intergenerational wealth mobility and intragenerational wealth mobility describe distinct phenomena.

Intergenerational wealth mobility focuses on the change in financial status between different generations of a family—specifically, how a child's wealth compares to their parents' wealth. It examines the extent to which economic advantages or disadvantages are transmitted across family lines. For example, if a child born to parents with low wealth achieves high wealth in their adulthood, this represents strong intergenerational upward mobility.
Intragenerational wealth mobility, on the other hand, refers to an individual's change in financial standing or wealth distribution within their own lifetime. It tracks how an individual's wealth fluctuates due to factors like career progression, investment outcomes, or life events. For example, a person starting their career with limited assets but accumulating significant wealth by retirement demonstrates high intragenerational upward mobility.

The key distinction lies in the comparison point: intergenerational mobility compares a child to their parents, while intragenerational mobility compares an individual's current self to their past self. While related, a society can exhibit high intragenerational mobility (individuals moving up or down within their lifetime) but low intergenerational mobility (meaning that despite individual changes, children largely end up in the same relative economic position as their parents).

FAQs

What factors influence intergenerational wealth mobility?

Factors influencing intergenerational wealth mobility include access to quality education, parental investments in human capital, inherited assets, social networks (social capital), economic policies (such as taxation and social welfare programs), and macroeconomic conditions. The extent of philanthropy and wealth transfer practices also plays a role.

Why is intergenerational wealth mobility important?

It is important because it reflects the fairness and equality of opportunity within a society. High mobility suggests that individuals have a greater chance to succeed regardless of their birth circumstances, fostering a more equitable society. Low mobility, conversely, can lead to persistent income inequality and social stratification.

Is intergenerational wealth mobility increasing or decreasing?

Trends in intergenerational wealth mobility vary by country and over time. In many developed nations, there is evidence of low and in some cases declining intergenerational mobility, particularly at the bottom and top of the wealth distribution. For instance, an OECD report found that upward mobility has become less likely, and "sticky floors" and "sticky ceilings" have become more pronounced in some countries since the 1990s., ³H²owever, some research on the U.S. using different measures suggests relative stability in rank-based mobility for certain birth cohorts, though the consequences of initial advantage or disadvantage have grown due to rising inequality.¹