Intergenerational Mobility, Inequality and Government Investment in the United States

Background: Given the widely-accepted finding that countries with greater income inequality also experience less income mobility across generations (Corak, 2013; Krueger, 2012), it is expected that American mobility has decreased along with rising income inequality in recent decades (Aaronson & Mazumder, 2008; Corak, 2013; Mazumder, 2012). However, mobility has remained unchanged (Chetty, Hendren, Kline, Saez, & Turner, 2014), and is unresponsive to changes in income inequality (Bloome, 2015).  These findings raise questions as to why intergenerational income mobility in the U.S. has not fallen during the periods when income inequality has sharply risen. To address these questions, the study focuses on two aims. The first aim is to examine the association between intergenerational income mobility and income inequality in the United States. The second aim is to examine intergenerational income mobility with respect to income inequality and government spending.

Methods: The main data for this study come from the National Longitudinal Study of Youth 1979. The basic sample includes 4,824 parents-children pairs. I aggregate the state-level data from several different resources such as such as IRS’s Statistics of Income, U.S. Census of Governments, and the U.S. Bureau of Labor Statistics. The state-level sample includes 220 state-year observations. State-year fixed effects models are employed to examine the research aims.

Results: Overall, the intergenerational elasticity (IGE) of income is about 0.43, and the transition matrix indicates that the US is highly immobile, especially when looking at the extreme income groups of the bottom and the top. This study finds that rising income inequality acts to strengthen the importance of parental family income to child’s income. Particularly, the evidence that higher income inequality decreases intergenerational mobility is obvious when migration problems are addressed. This study extends to include government spending and provides evidence that additional government spending contributes to promoting intergenerational mobility. Moreover, government spending moderates the effects of income inequality on intergenerational mobility. This evidence indicates that government spending plays roles in preventing the decline in intergenerational mobility by offsetting the consequences of income inequality on mobility. A number of sensitivity tests confirm that the main results are robust and reliable. However, these results are not uniform across the subgroups—gender, race, and family structure. There are wide variations in the IGE, the effects of income inequality and government spending across the subgroups and by different income measures.

Implications:  Rising income inequality contributes to strengthening the transmission of economic advantages and disadvantages across generations through parental resources available for children’s development that are attributable to diverging children’s human capital and skills. Income inequality matters since it hinders the equal opportunity to succeed, especially for children from low-income families. This study demonstrates that government spending plays an important role in promoting intergenerational mobility by offsetting the consequences of income inequality. Yet, this study does not claim that the effects of increased spending on increased intergenerational mobility are limitless across all types of subgroups. Instead, economically disadvantaged children are more likely to benefit in their human capital and skill development from increasing government spending.