The Intergenerational Elasticity of Earnings: Exploring the Mechanisms

Authors: Uta Bolt, Eric French, Jamie Hentall MacCuish, Cormac O’Dea,
Series: Issue: 11 2021
Themes: , ,
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Rich parents have rich children. Why is that? This paper evaluates several different potential channels that might explain the persistence in earnings between parents and children.

In particular, the researchers study the relative importance of differences in years of schooling, cognitive skills, parental investments, and family background.

To do so, they use a cohort born in 1958 in the UK, which has been followed since birth until today.

They find that more than half (54% for men, 62% for women) of the relationship between parental and child income can be explained by the channels described above.

Differences in investments made by parents are most important in explaining intergenerational earnings persistence. The reason for this is that they are crucial in increasing an individual’s cognitive skills and years of schooling, which in turn lead to higher earnings.

The researchers conclude that policies that equalise these investments could improve income mobility.