Intergenerational Income Mobility

 
 

Intergenerational Income Mobility

The extent to which differences in income are transmitted from one generation to the next.
 

Please note:
The data on this page are current as of January 2013.

Key Messages

  • Canada earns an “A” and ranks 4th of 13 peer countries.
  • Intergenerational income mobility can be seen as a measure of equality of opportunity.
  • Improving income mobility may be a way to achieve greater economic efficiency.

International Income Mobility (chart)

Putting intergenerational income mobility into context

Intergenerational income mobility refers to the extent to which income levels are able to change across generations. If there were 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 University of Ottawa professor 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

The intergenerational income mobility indicator is a good companion indicator to income inequality. While income inequality can be thought of as an indicator of equality of outcome, the intergenerational income mobility indicator can be thought of as an indicator of equality of opportunity.

Some countries are more concerned about ensuring equality of outcome—in other words, ensuring that there are no large income gaps. The Scandinavian countries, for the most part, fall into this group.

Other countries are more interested in ensuring that there is equality of opportunity. The reasoning is that as long as everyone has the same opportunity to move up the income ladder, gaps in income are not unfair; they reveal differences in such things as education and employment choices. The U.S. falls into this group.

How is intergenerational income mobility measured?

Intergenerational income mobility is measured by calculating the elasticity of intergenerational earnings. 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.

Take, for example, a country with an intergenerational earnings elasticity of 0.20. This means that if an individual in that country earns $10,000 less income than the average, 20 per cent of that difference (or, $2,000) will be passed on to the individual’s children. In other words, the children will earn $2,000 less than the average.

How does Canada compare to its peers on income mobility?

Canada’s record on intergenerational income mobility is much better than that of many of its peers. There is less relationship between a family’s background in Canada and the adult incomes of that family’s children. Only 19 per cent of a family’s disadvantage is passed on to their children. This means, for example, that if a family earns $10,000 less income than the average, the children will earn $1,900 less than the average.

For a family in the U.S., the children would earn $4,700 less; in the U.K., the children would earn $5,000 less. This is nearly two and a half times that of Canada. While Americans like to think of their country as one where everyone has a relatively equal chance of success, the fact is that the U.S. has less equality of opportunity than most of its peers. Miles Corak explains:

There is a disconnect between the way Americans see themselves and the way the economy and society actually function. Many Americans may hold the belief that hard work is what it takes to get ahead, but in actual fact the playing field is a good deal stickier than it appears. Family background, not just individual effort and hard work, is importantly related to one’s position in the economic and social hierarchy. This disconnect is brought into particular relief by placing the United States in an international context. In fact, children are much more likely as adults to end up in the same place on the income and status ladder as their parents in the United States than in most other countries.2

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.

But there is less mobility at the very top of the income brackets, according to a recent report by Statistics Canada. The report concludes that the top 1 per cent of tax filers have become more likely to remain in the group. Among those who were in the top 1 per cent in 1983, two-thirds (67 per cent) had also been in the top 1 per cent the year before, in 1982. “By 2010, this one-year measure of high-income persistence had risen to 72 per cent.”3 In other words, 72 per cent of those in the top 1 per cent in 2010 had also been there the year before, in 2009.

The report also notes that the five-year persistence increased as well. In 1987, nearly 44 per cent of the top 1 per cent had been in that group five years before. That share jumped to 48 per cent in the early 1990s and 52.7 per cent in 2010.4

Why is income mobility important?

A study for the OECD notes several reasons why income mobility is important:5

  • 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.

Why do some countries have more income mobility than others?

In his paper Inequality From Generation to Generation: The United States in Comparison, Miles Corak summarizes the literature on the reasons why poor children in some countries are more likely as adults to end up poor than children in other countries. He notes three factors that determine the ability of children to move into a higher economic class: 

  1. family background and resources 
  2. labour market inequalities
  3. government policies

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.”6 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 with 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.”7

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.8

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.”9 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.”10

Footnotes

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), 2 (accessed August 31, 2009).

2 Miles Corak, Inequality From Generation to Generation: The United States in Comparison, 1 (accessed November 6, 2012).

3 Statistics Canada, “High-Income Trends Among Canadian Taxfilers, 1982 to 2010.The Daily (Ottawa: Statistics Canada, 2013).

4 Statistics Canada, “High-Income Trends Among Canadian Taxfilers, 1982 to 2010.The Daily (Ottawa: Statistics Canada, 2013).

5 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), 12.

6 OECD, Growing Unequal? Income Distribution and Poverty in OECD Countries (Paris: OECD, 2008), 204 (accessed August 31, 2009).

7 Jo Blanden, Paul Gregg, and Stephen Machin, Intergenerational Mobility in Europe and North America (London: LSE, 2005) (accessed August 31, 2009).

8 Jo Blanden, Paul Gregg, and Stephen Machin, Intergenerational Mobility in Europe and North America (London: LSE, 2005) (accessed August 31, 2009).

9 Jo Blanden, Paul Gregg, and Stephen Machin, Intergenerational Mobility in Europe and North America (London: LSE, 2005) (accessed August 31, 2009).

10 Jo Blanden, Paul Gregg, and Stephen Machin, Intergenerational Mobility in Europe and North America (London: LSE, 2005) (accessed August 31, 2009).

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