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Your American Dream is Not Mine! A New Approach to Estimating Intergenerational Mobility Elasticities

Yonghong An, Wang Le () and Ruli Xiao ()
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Wang Le: The University of Alabama
Ruli Xiao: Indiana University

No 2015-016, CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: This paper provides a new framework to estimate intergenerational mobility elasticities (IGE) of children's income with respect to parental income. Our approach is nonparametric allowing for heterogeneity in IGEs and nonlinearity by leaving the relationship unspecified, while acknowledging the latent nature of both child and parental permanent incomes. Our approach also addresses life-cycle bias directly in estimation without requiring knowledge of permanent income as the previous literature does. We confirm some of the previous findings and also have some novel results. First, we uncover that the association between observed annual income and permanent income varies over the life cycle; and that the observed patterns differ over generations, although the latter result is statistically insignificant due to large variances. Second, we find strong evidence that there exists substantial heterogeneity in IGEs across population and that the mobility function is nonlinear. The implied IGE exhibits a Ushape pattern with "twin-peaks". Specifically, there is a considerable degree of mobility among the broadly defined middle class, but both the children of high and low income fathers are more likely to be high and low income adults, respectively. This result suggests that the U.S. is indeed the "land of opportunity" to live out the "American Dream", just not for everyone! These results survive a battery of robustness checks. Finally, we also find that there exist a great deal of within-group heterogeneity. Our approach is also immediately applicable in many other similar contexts both within and outside labor economics.

Pages: 48 pages
Date: 2015-09
New Economics Papers: this item is included in nep-ltv
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