In a study published in collaboration with the Internal Revenue Service (IRS), Stanford researchers showed that economic mobility is much more restricted by one’s family background than previously thought. The paper was released on July 8, and its authors included Pablo Mitnik, research associate at the Stanford Center on Poverty & Inequality, and David Grusky, Stanford professor of sociology and director of the Center on Poverty and Inequality.
“The research that we report, which addresses some of the methodological complications that have beset this earlier research, suggests that the intergenerational elasticity is at the high end of the existing range of estimates,” Grusky said.
Intergenerational elasticities (IGEs), according to Grusky, measure the percent increase in income that a child can expect to secure for every percent increase in the income of his or her parents — in other words, the monetary accrual of children born into high-income families. A higher elasticity number implies that it is more difficult for a person to move outside the income class into which he or she was born.
According to the IGEs found by Grusky and his team, children born into low-income families are likely to earn much less in their lifetimes than children born into families with higher incomes. These results differ greatly from what was thought previously.
The first stream of research on IGEs, which began in the 1970s, presented results of intergenerational correlations of approximately 0.2 or less, which meant that only one-fifth of the differences in familial incomes are passed on to children. This means that if a parent earns $10,000 less than the average income, 20 percent of that difference ($2,000) will be passed on his or her children.
Mitnik and his team’s recent research shows that approximately half of parental income differences are passed on to their children. The family-income IGEs, which show the total-income benefits that result from being raised in higher-income families, are estimated at 0.52 for men and 0.47 for women.
However, women raised in higher-income families benefit less when it comes to their own earnings, with the individual earnings elasticities at 0.32 for women and 0.56 for men. The difference in women’s elasticities is accounted for since women raised in higher-income families are more likely to marry high-earning spouses.
The total-income elasticities are driven even higher because children from higher-income families are more likely to be married, and with higher-earnings partners.
In addition to yielding new results, the study advanced new methods and used new, high-quality data based on tax and other administrative records, though only IRS employees had access to individual tax records per IRS rules. In this way, Mitnik and his team overcame previous methodological complications that made it difficult to measure elasticity, such as small sample sizes, missing data or measurements taken too early in people’s lives.
Grusky listed the advantages of the dataset they used.
“The sample is large; high-income families are well represented; the income data are taken directly from tax returns and other administrative sources and are therefore likely to be more accurate than the self-reported data available in surveys,” Grusky said. “The data allow for analyses of both before- and after-tax income, and the economic status of parents can be more accurately assessed because their income is measured over many years.”
In addition to these improvements, Mitnik and Grusky also brought a new element to the study by measuring the income and earnings of families in which the children were between 35 and 38 years old — an age span that provides a better approximation to lifetime differences in income or earnings.
Grusky and his team argue that this research is of great significance at the national level.
“[The measure of intergenerational elasticity] conveys information on whether the country is living up to its commitment to providing the same opportunities to all children, no matter how advantaged or disadvantaged their parents may be,” Grusky said.
Contact Ruiwen Adele Shen at shen.adele ‘at’ gmail.com.