When a child wins the “birth lottery” by being born into a higher-income family, the economic payoff is very large, say researchers.
“This result is not consistent with the American dream in which children from low-income families are supposed to have ample opportunities for economic mobility,” says David Grusky, the director of the Stanford Center on Poverty and Inequality.
In a new study of economic mobility, based on tax data, the gap between this ideal and the reality of the US economy is shown to be very large, Grusky says.
“The American dream is about ensuring that all children, no matter how poor their parents may be, have an opportunity to be mobile by climbing the economic ladder and moving into a higher income group,” he says.
How to Measure ‘Elasticity’
Pablo Mitnik, a research associate at the Stanford Center on Poverty and Inequality and lead author of the report, says the research is based on a measure of economic mobility known as the “intergenerational income elasticity,” which reveals the economic payoff of being raised in a higher-income family.
In a society with perfect mobility, this elasticity would equal zero and there would be no economic payoff, on average, to being raised in a higher-income family. Although Mitnik notes that it is well-known that the elasticity is much larger than zero, there has been uncertainty in prior research about exactly how large it is.
The elasticity is a concrete measure of the payoff to being raised in a higher-income family. “This measure tells us how much the adult income of children increases with each additional percent of parental income,” Mitnik says.
In other words, if children from families making $50,000 per year are compared with those from families making $60,000 per year, this measure describes how much of that 20 percent difference is carried forward into the adult lives of those children, according to Mitnik. If the elasticity were one, then the full 20 percent advantage would be passed on.
Benefits of Family Income
The study revealed that the elasticity is very large: The family-income elasticity is .52 for men and .47 for women.
“These two estimates, both of which are toward the high end of the existing range of estimates in the research literature, indicate that approximately half of parental income differences are passed on to children,” Mitnik says. Similarly, the elasticity for individual earnings (wages and salary from someone’s job) was as high as .56 for men.
It is noteworthy, Grusky says, that the family-income elasticities for men and women are quite similar (.52 for men and .47 for women). This means that they obtain roughly the same total-income benefits from being raised in higher-income families.
But the research also shows that the earnings elasticity for women, .32, is much lower than that for men, .56.
Though women raised in higher-income families benefit less when it comes to their own earnings, Grusky says this disadvantage is counteracted by an increased chance of marrying a spouse who will bring money into the family.
“The upshot is that, for women and men alike, the benefits to a higher-income upbringing are substantial,” he says.
The purpose of the report, Grusky says, was simply to “present the facts to the public,” not to weigh in on whether the country should act on them.
But he adds that “insofar as there is a commitment to equalizing opportunity, it will likely require ramped-up policies that go well beyond those that are typically entertained.”
Grusky says, “The birth lottery is so consequential that there is no escaping the conclusion that the usual policy interventions are just too narrow-gauge and incremental to get the job done.”
The problem with prior research, Mitnik says, is that a host of methodological complications made it difficult to measure the elasticity. These problems include small sample sizes, missing data, or measurements taken too early in peoples’ lives.
Mitnik and Grusky say their research overcomes these problems by advancing new methods and relying on a new high-quality data set based on tax and other administrative records.
This data set, Mitnik says, was developed within the Statistics of Income Division of the Internal Revenue Service (IRS) under the guidance of coauthors Michael Weber and Victoria Bryant of the IRS Statistics of Income Division. During the research, all access to tax data was limited to Weber, Bryant, and other IRS employees per IRS rules.