Intergenerational Income Mobility
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[ September 2009 ]
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Putting intergenerational mobility into context
Intergenerational income mobility refers to the extent to which income levels are able to change across generations. If there was no intergenerational mobility at all (that is, the intergenerational income elasticity was equal to 1), all poor children would become poor adults and all rich children would become rich adults. In the case of complete intergenerational mobility (that is, the intergenerational income elasticity was equal to zero), there would be no relationship between family background and the adult income outcomes of children. A child born into poverty would have exactly the same likelihood of earning a high income in adulthood as a child born into a rich family.
As described by Statistics Canada researcher Miles Corak, “If we live in a society characterized by a high degree of mobility then low income during childhood may not be an experience that necessarily leaves a scar, pre-ordaining individuals to low-income as adults or to less engagement in society. In a society with a low degree of intergenerational mobility this is not the case: where one is going is closely linked to where one has been.”1
How is intergenerational income mobility measured?
Intergenerational income mobility is measured by calculating the intergenerational earnings elasticity. A higher elasticity number implies that it is more difficult for a person to move outside the income class he or she was born into. There are large differences among peer countries. Canada ranks among the top performers and receives an “A” grade, with an intergenerational earnings elasticity of 0.19. If an individual earns $10,000 less income than the average, 19 per cent of that difference (or, $1,900) will be passed on to the individual’s children. In other words, the children will earn $1,900 less than the average. The most income mobility is found in Denmark, which has an intergenerational earnings elasticity of 0.15. This means that 15 per cent the relative difference in parental earnings is transmitted, on average, to their children. The U.K. is the worst performer on this indicator, with an earnings elasticity of 0.5. Parents earning $10,000 less than the average will pass on 50 per cent of that difference to their children. The children, in other words, will earn $5,000 less than the average.
Why is income mobility important?
A study for the OECD notes several reasons why income mobility is important:2 - The ways resources are allocated across generations today may influence social welfare for generations.
- Increased income mobility may improve equity by reducing economic inequality, promoting social justice, and achieving a more equitable allocation of resource. For example, the likelihood of achieving social cohesion may be higher in a society where people believe they can improve their economic circumstances on merit rather than be limited by a poor socio-economic background.
- Improving income mobility may be a way to achieve greater economic efficiency, in that the talents of people from disadvantaged backgrounds are not wasted.
What affects income mobility?
Although there is no consensus in the literature, some evidence suggests that income mobility is higher in countries with less income inequality. As noted by the OECD, “the more unequal a society is, the more difficult it is to move up the social ladder, simply because children have a greater gap to make up.” 3 Canada and Australia appear to be the exceptions. Despite relatively high levels of income inequality, the two countries also boast relatively high income mobility, which means individuals do not, compared to other peer countries, find themselves stuck in a particular socio-economic class. According to an OECD study, the Australia and Canada anomaly “may be due to immigration—there is evidence that immigration increases both current inequality and income mobility—but also to the interventions made in early education and care and on disadvantaged individuals as well. Another explanation is that this is a temporary situation: it is possible that in future greater immobility between generations could be expected to increase.” 4
Why is income mobility in the U.K. so low?
Both the U.K. and U.S. do poorly on the measure of class mobility. Yet, disturbing for the U.K., a recent study conducted by researchers from the London School of Economics and Political Science (LSE) found that the gap in opportunities in the U.S. is at least static, while in Britain it is widening. 5
The study concludes that part of the reason for the decline in mobility has been the increasing relationship between family income and educational attainment among these cohorts—“this was because additional opportunities to stay in education at both age 16 and age 18 disproportionately benefited those from better-off backgrounds.” 6 The research also showed that “family income in the childhood years does make a genuine difference to educational outcomes, rather than reflecting other aspects which differ across families.” 7
1 Miles Corak, “Are the Kids All Right? Intergenerational Mobility and Child Well-being in Canada,” Analytical Studies Branch—Research Paper Series 11F0019MIE No. 171 (Ottawa: Statistics Canada, 2001), p. 2, [online, cited August 31, 2009]. 2 Anna Cristina d’Addio, Intergenerational Transmission of Disadvantage: Mobility or Immobility Across Generations? A Review of the Evidence for OECD Countries, OECD Social, Employment and Migration Working Paper No. 52 (Paris: OECD, March 2007), p. 12. 3 OECD, Growing Unequal? Income Distribution and Poverty in OECD Countries (Paris: Author, 2008), p. 204, [online, cited August 31, 2009]. 4 Jo Blanden, Paul Gregg, and Stephen Machin, Intergenerational Mobility in Europe and North America (London: LSE, 2005) [online, cited August 31, 2009]. 5 Jo Blanden, Paul Gregg, and Stephen Machin, Intergenerational Mobility in Europe and North America (London: LSE, 2005) [online, cited August 31, 2009]. 6 Jo Blanden, Paul Gregg, and Stephen Machin, Intergenerational Mobility in Europe and North America (London: LSE, 2005) [online, cited August 31, 2009].
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